Work Opportunity Tax Credit
Employers can claim the work opportunity tax credit (WOTC) if they hire individuals from certain groups that have consistently faced significant barriers to employment.
Commonly referred to as WOTC, Form 8850 and federal work opportunity tax credit.
Do I Qualify for the Work Opportunity Tax Credit?
If you hire new employees from certain groups that have faced significant barriers to employment, you can claim the work opportunity tax credit.
2022 Work Opportunity Tax Credit Details
The work opportunity tax credit (WOTC) is a federal tax credit employers can claim if they hire individuals from certain groups determined by the law to have consistently faced significant barriers to employment.
Which New Hires Can Qualify Businesses for the WOTC?
New hires who might qualify you for the credit include:
• Recent recipients of Temporary Assistance for Needy Families (TANF)
• Recipients of long-term family assistance
• Qualified veterans
• Ex-felons
• Residents of empowerment zones, enterprise communities or renewal communities
• Recent recipients of Supplemental Nutrition Assistance Program (SNAP) benefits
• Summer youth employees
A complete list of targeted groups is available on the IRS website.
How Is the WOTC Calculated?
The calculation of the credit is based on the amount of wages you pay to qualifying employees in their first year of employment with you. Each group is subject to different limitations.
Employers can earn a credit equal to:
• 25% of qualifying wages if the employee works at least 120 hours
• 40% if the employee works at least 400 hours
However, most certifications are capped at $6,000 per employee.
For employees who were certified as long-term family assistance recipients, second-year wages are also included. Different limits may apply for veterans, long-term family assistance recipients and summer youth employees.
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Benefits
• Tax credits result in a dollar-for-dollar reduction of the payroll tax your business owes.
• Tax-exempt employers can claim the WOTC against payroll taxes.
Considerations
• Your ability to claim the credit may depend on employees certifying their eligibility through state agencies.
• You must complete IRS Form 8850 and a DOL ETA Form 9061 or 9062 and submit them to the workforce agency in the state where the employee will be working. This is typically done alongside the employment application for the company.
• The credit is not available for employees who have worked for you previously or for any employee who is your dependent or related to you.
• You cannot deduct the wages used to calculate the credit to reduce your taxable income.
• For 2020 and 2021, you cannot claim both the employee retention credit and the WOTC for the same employee.
Assumptions When Taking the Work Opportunity Tax Credit
• All employees who qualify for the work opportunity credit will work more than 400 hours in one year.
• If any qualifying employees work fewer than 400 hours, complete a custom strategy in lieu of this strategy.
Conflicting Strategies
• None noted.
Requirements to Claim the Work Opportunity Tax Credit
• The amount of qualified first-year wages that can be taken into account when calculating the credit must be capped at $6,000.
Business Entities That Can Claim the Work Opportunity Tax Credit
• Schedule C
• Schedule F
• S Corporation
• C Corporation
• Partnership
The material discussed on this page is meant for general illustration and/or informational purposes only and is not to be construed as investment, tax, or legal advice. You must exercise your own independent professional judgment, recognizing that advice should not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. Further, any advice you provide in connection with tax return preparation must comply in full with the requirements of IRS Circular 230.