The Work Opportunity Tax Credit (WOTC) allows for-profit employers of any size to reduce their federal tax liability by hiring people who fall within designated target groups that have consistently experienced high rates of unemployment. As such, it helps both employers who are facing labor shortages and certain groups of people who need assistance in finding jobs.
Employers can claim up to $9,600 per employee in tax credits per year, but the exact tax benefit amount that businesses can receive depends on the target group of the individual who was hired, the wages paid to that individual in the first year of employment, and the number of hours that individual worked. There is no limit on the number of workers an employer can hire to qualify for the credit, but there is a maximum tax credit that can be earned per individual, and the amount varies by WOTC target groups.
WOTC Target Groups
Since it was created in 1996, the Work Opportunity Tax Credit has changed, and while some of the original WOTC target groups still remain in place, some of them were modified while others no longer exist. The current WOTC target groups are:
WOTC is available for qualifying veterans who meet the criteria for one or more of the following categories at the time of hire:
- A veteran who received food stamps (Supplemental Nutrition Assistance Program, or SNAP) for three consecutive months within the last 15 months;
- A veteran who is entitled to compensation for a service-connected disability and was discharged from the military within one year prior to the hiring date;
- A veteran who is entitled to compensation for a service-connected disability and was unemployed for at least six months during the year prior to the hiring date;
- A veteran who was unemployed for at least four weeks but less than six months during the year prior to the hiring date; and
- A veteran who was unemployed for at least six months within one year prior to the hiring date.
Qualified IV-A Recipient
A WOTC-eligible IV-A recipient is an individual who is a member of a family receiving assistance under a state plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
Qualified ex-felons are individuals who were convicted of a felony and hired within a year after their date of conviction, work release, or release from prison or jail.
Designated Community Resident
A designated community resident is an individual between the ages of 18 and 39 and resides within one of the following:
- An empowerment zone;
- An enterprise community; or
- A renewal community.
Also, a designated community resident must continue to reside at these locations after employment.
Vocational Rehabilitation Referral
A vocational rehabilitation referral is an individual who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
- A state plan approved under the Rehabilitation Act of 1973; or
- An Employment Network Plan under the Ticket to Work program; or
- A program carried out under the Department of Veteran Affairs.
Summer Youth Employee
A summer youth employee is an individual aged 16 or 17 who has a principal place of abode within an empowerment zone, enterprise community, or renewal community and is employed between May 1 and September 15.
Qualified Supplemental Nutrition Assistance Program (SNAP) Recipient
A qualified Supplemental Nutrition Assistance Program (SNAP) benefits recipient is an individual who on the date of hire is at least 18 years old and under 40 and a member of a family that received SNAP benefits for:
- the previous 6 months; or
- at least 3 of the previous 5 months.
Supplemental Security Income (SSI) Recipient
Members of this WOTC target group include individuals who have received Supplemental Social Security (SSI) under Title XVI of the Social Security Act for any month ending within the 60-day period ending on the hiring date.
Long-Term Family Assistance Recipient
A long-term family recipient is an individual who, at the time of hire, is a member of a family that meets one of the following conditions:
- Received assistance under a IV-A program for a minimum of the prior 18 consecutive months; or
- Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period; or
- Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
Qualified Long-Term Unemployment Recipient
A member of this target group is an individual who has been unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law at some point during this period.
Some exclusions apply to WOTC eligibility. The following individuals or groups of individuals cannot qualify for the WOTC, even if they are members of WOTC target groups:
- Employer’s relatives and dependents;
- Majority owners of the company; and
- Former employees.
Benefits of Claiming The Work Opportunity Tax Credit
Since its establishment, the WOTC program has assisted employers to improve their bottom line with millions of dollars in federal income tax savings. Also, some employees considered to be lacking skills and abilities or having a barrier to employment were not hired because they were viewed as too much of a risk. However, with this tax-saving opportunity, members of WOTC target groups can gain employment in what otherwise would be a difficult situation in securing a job.
Getting the most from WOTC benefits involves managing many challenges like meeting deadlines established by law, submitting forms to state agencies, monitoring hours and wages, providing supporting documentation, and calculating tax credits. Due to the complex administrative processes, significant resources are required to implement the program correctly. However, automating the WOTC management allows employers to simplify the process, reduce errors, and streamline the forms necessary for certification. As a result, they can not only cut their business expenses, but they can also make a significant difference for members of WOTC target groups.