Everyone deserves a chance to succeed. Unfortunately, today’s talent acquisition doesn’t always reflect that.
The Work Opportunity Tax Credit (WOTC) helps Americans by rewarding companies for more equitable hiring. The value of the WOTC can vary depending on where your business operates and who it hires. Therefore, it’s important to know:
- how WOTC works
- how it affects your organization
- how the right HR tech makes maximizing this and other tax credits easier
Lean on these questions — and their answers — to kick-start and sharpen your WOTC expertise.
What is the Work Opportunity Tax Credit (WOTC)?
WOTC is a federal tax credit that incentivizes businesses to hire from groups that have “faced significant barriers to employment.” It was created through the Small Business Job Protection Act of 1996.
Because WOTC is a dollar-for-dollar reduction — not a deduction — businesses can greatly reduce or even eliminate their federal income tax liability, while lowering their effective corporate tax rate.
According to the IRS, the WOTC boosts “diversity and facilitates access to good jobs for American workers.” Other benefits include:
- reduced tax liability for private and for-profit employers
- opportunities for people to improve their quality of life
- more equitable workplaces with broader perspectives
While the WOTC lightens businesses’ tax burden, it is ultimately designed to help prospective employees break a cycle of unemployment.
Who qualifies for WOTC?
Today, WOTC encompasses 10 “targeted groups” and is authorized through Dec. 31, 2025, per the Consolidated Appropriations Act of 2021.
Though WOTC applies to specific individuals, the number of candidates who qualify may be larger than you think. According to Bloomberg Tax, 1 in 5 new hires could be eligible under the program. Plus, the IRS confirms businesses of any size may claim WOTC, including certain tax-exempt employers.
Make sure you’re not leaving money on the table! Here’s a complete list of the 10 targeted groups currently eligible for WOTC claims:
1. Ex-felons
This refers to employees who are hired within a year of being convicted of or released from prison for a felony.
2. IV-A recipients
An individual whose family receives aid through a state program funded by Part A of Title IV of the Social Security Act (hence, “IV-A”) may qualify for WOTC claims. (This aid is sometimes called TANF, or Temporary Assistance to Needy Families.)
To qualify, the candidate must receive at least nine months of aid during an 18-month period that ends with their hire date.
3. Long-term family assistance recipients
This refers to a candidate whose family meets one of these conditions:
- Received IV-A aid for 18 consecutive months up to their hiring date
- Received IV-A aid for 18 consecutive months since Aug. 5, 1997, and continued to receive benefits for no more than two years before their hiring date
- Became ineligible for a IV-A program because they met the maximum payments they could receive within two years before their hiring date
4. Qualified veterans
WOTC can help transition certain veterans into the civilian workforce if they meet any of these conditions:
- their family received food stamps for at least three months during a 15-month period before their hiring date
- they were unemployed for at least four weeks within a year of their hiring date
- they are entitled to military disability and were hired within a year of leaving active duty
5. Designated community residents (DCR)
DCRs are candidates who reside in empowerment zones or rural renewal counties when they’re hired. Both areas are designated by economic distress — such as from population loss — identified by the federal government.
6. Vocational rehabilitation referrals
Candidates with a physical or mental disability may be referred to an organization during or after completing rehabilitation.
Qualifying rehabilitation services are defined by the:
7. Summer youth employees
To qualify as a summer youth employee, a candidate must reside in an empowerment zone and be at least 16, but under 18 as of their hiring date (or May 1 of the applicable year). These hires may work only between May 1 and Sept. 15.
8. Supplemental Nutrition Assistance Program (SNAP) recipients
Any individual between the ages of 18 and 40 qualifies for WOTC if their family received SNAP benefits for either six months or three of the past five months up to their hiring date.
9. Supplemental Security Income (SSI) recipients
People who have received SSI within 60 days prior to their hiring date count toward WOTC claims. This helps certain candidates overcome the limitations of a fixed income.
10. Long-term unemployment recipients
Candidates who were unemployed for at least 27 consecutive weeks before they were hired and received any government assistance during their unemployment period qualify for WOTC.
How much money in tax credits can employers get from WOTC?
In most cases, WOTC equals 40% of up to $6,000 in wages a qualifying employee earns during their first year. The earnings also must represent at least 400 hours of work. This means the maximum tax credit is usually $2,400.
Some situations can reduce and significantly raise WOTC’s value. For instance, employees who work less than 400 hours, but at least 120 may qualify for an organization to receive 25% credit. Businesses hiring certain qualified veterans may be eligible for up to a $2,400 credit per each applicable employee.
How do companies claim WOTC?
Like other tax credits, WOTC can be a boon to qualifying businesses — provided they apply for it in time. Organizations must submit a WOTC verification request to the appropriate state agency within 28 days of the covered employee’s start date.
Generally, both the employer and the job applicant must file an IRS Form 8850, in addition to an ETA Form 9061 or an ETA Form 9062. According to the U.S. Department of Labor, Form 9062s are generally provided by job placement or partnering agencies. Employees who aren’t registered with such an agency will likely need to file Form 9061.
Since qualification may shift across states, HR should always consult their state’s or states’ workforce agencies to verify their complete WOTC requirements.
How can the right HR tech help businesses with WOTC?
Unexpected growth, turnover and other factors may spur organizations to hire quickly. But that doesn’t mean they should miss out on tax breaks. A tax credits service backed by specialized experts and easy-to-use HR tech weaves WOTC into the hiring and onboarding process.
First, the service screens candidates for WOTC eligibility from their job applications, then calculates the potential credits before an employer makes a hiring decision. It can even verify qualifying employees who were recently hired, eliminating any blind spot for possible credits.
Some services even conduct the eligibility search at no cost to the organization. If no credits are found, the company doesn’t have to pay a penny for the search.
Once an eligible new hire is onboarded, the service applies and administers the appropriate credits on the business’ behalf. HR professionals are automatically notified of required program deadlines and other important dates. This helps ensure employers reap the benefits of WOTC without adding unnecessary work to HR’s plate.
WOTC encourages businesses to hire diversely while giving millions of Americans the means to not just work, but thrive. And the right tools make sure no tax-credit opportunity is overlooked.
Explore Paycom’s tax credits software to see how it helps maximize your business’s WOTC eligibility.
DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.
