Tax Benefits for Hiring Employees that Face Barriers to Employment
The Work Opportunity Tax Credit (WOTC) may enable both taxable businesses and qualifying not-for-profit organizations to meet their hiring needs and increase workplace diversity while earning tax breaks that could reduce their tax liability.
Work Opportunity Tax Credit Overview
The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The tax credit may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:
- is in their first year of employment;
- is certified as being a member of a targeted group; and
- performs at least 400 hours of services for that employer.
The maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans. An employer cannot claim the WOTC for employees who are rehired.
A taxable business may apply the WOTC against its business income tax liability.
For Qualified Tax-Exempt Organizations, the credit is limited to the amount of employer Social Security tax owed on the taxable social security wages and tips reported by the exempt organization for the employment tax period for with the credit is claimed.
In general, taxable employers may carry the current year’s unused WOTC back one year and then forward 20 years. Learn more.
There is no limit on the number of employees a business can hire. Employers file Form 5884 to claim the tax credit.
2022 New Hire Prescreening Process Update
The Internal Revenue Service recently updated the prescreening process for WOTC new hires. Form 8850: Pre-Screening Notice and Certification Request must now be completed by both the employer and job applicant on or before the day a job offer is made.
Employers are required to submit the completed form to the appropriate state workforce agency no later than 28 days after the employee’s first day.
An employer may claim the WOTC for an individual who is certified as a member of any of the following targeted groups:
- the formerly incarcerated or those previously convicted of a felony;
- recipients of state assistance under part A of title IV of the Social Security Act (SSA);
- residents in areas designated as empowerment zones or rural renewal counties;
- individuals referred to an employer following completion of a rehabilitation plan or program;
- individuals whose families are recipients of supplemental nutrition assistance under the Food and Nutrition Act of 2008;
- recipients of supplemental security income benefits under title XVI of the SSA;
- individuals whose families are recipients of state assistance under part A of title IV of the SSA; and
- individuals experiencing long-term unemployment.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.