Business Tax Credit Basics: The Work Opportunity Tax Credit

How can your business get valuable tax credits while expanding your workforce and benefiting your local community? The Work Opportunity Tax Credit (WOTC) may be the answer.

The WOTC is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups including:

    • Temporary Assistance for Needy Families (TANF)
    • Food stamp recipients
    • Residents of empowerment zones
    • Vocational rehabilitation referrals
    • Ex-felons
    • Supplemental security income recipients
    • Youth living in empowerment zones for summer jobs

Nationwide, businesses claim about $1 billion in tax credits annually under the WOTC program. The maximum tax credit can be up to $9,600 for each qualifying new employee during the first year of employment.

You don’t have limits on the number of individuals you hire from target groups. This is good news for potential employees, too, since individuals in these groups can experience significant employment barriers.

How WOTC Works

John, a veteran, is hired at your company for a part-time position. As the employer, your WOTC tax credit lasts for two years. In year one the credit equals 40 percent of John’s wages. If John stays on board, your tax credit in year two is 50 percent of his wages. Even though he’s part-time, because John works more than 400 hours each year – the minimum – you still qualify for the tax credit.

While 400 hours per year is the minimum to claim the full tax credit, partial credit (25 percent) is available starting at 120 hours.

These are just the basics; there is a lot of fine print. Before you calculate your company’s potential tax breaks, check out the full details on the official WOTC site.

How Do I Know if My Employee Fits the Profile?

How do you determine if Sharon, your new hire, fits one of the profiles mentioned above? The U.S. Equal Opportunity Commission (EEOC) protects employers from discriminatory claims or lawsuits when you ask congressionally mandated questions on WOTC screening and application forms.

You can ask Sharon for her date of birth, for example. The EEOC protects you since any eligible employee must be younger than 40 for age-specific categories like the summer youth program. What if Sharon isn’t hired for a summer job? In that case, use this online tool from the U.S. Department of Housing and Urban Development (located under the What’s New tab on their website). The tool will help you see if Sharon lives in an empowerment zone.

Yet another tricky question: How-to determine if Sharon or her family uses food stamps. States have considerable discretion in definitions used for food stamps and the TANF program. For WOTC purposes, the term family is the same as the benefit household. Social service agencies in your state can clarify definitions for your region.


A helpful hint: No WOTC tax credit can be claimed for wages paid to relatives or dependents living with and employed by a taxpayer-employer.

You would use IRS Form 8850 to apply for WOTCs. Once completed, send the form to your state’s workforce agency within 28 calendar days of the employee’s start date. The Department of Labor has an updated WOTC Form 9061 or 9062 to request certifications for new employees.

If you’re expanding your workforce, consider the benefits of hiring individuals from one of these target groups. Aside from the tax credits – which can be substantial – you can make a long-lasting, positive impact on your community.

We can help you implement the Work Opportunity Tax Credit at your company. Call or email us with questions.

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