Skip to Content
Dipti Vaishnav
Article 2 min read

The work opportunity tax credit (WOTC) provides a reduction in income taxes for employers who hire individuals from targeted groups.

 People around desk

Congress created the Work Opportunity Tax Credit (WOTC) to encourage the hiring of disabled workers and those who might be at particular economic risk, such as recipients of federal assistance and the long-term unemployed. Employers should consider this potentially valuable credit when interviewing job applicants.

Targeted groups

WOTC promotes the hiring of people in “targeted groups,” such as financial aid recipients or the disabled.

These are the groups targeted for WOTC:

  • Qualified IV-A recipients: A member of a family receiving assistance under a state plan approved under federal Temporary Assistance for Needy Families (TANF) rules
  • Qualified veterans:

    • Vets who have been unemployed for at least six months during the last year

    • Vets who are entitled to compensation for a service-connected disability and were unemployed for at least six months or discharged or released from active duty during the past year

  • Qualified ex-felons

  • Residents of designated communities such as empowerment zones or rural renewal counties

  • Physically or mentally disabled individuals referred by an approved vocational rehabilitation service

  • Qualified summer youth employees

  • Qualified food stamp recipients

  • Recipients of federal Supplemental Security Income

  • Qualified long-term TANF recipients

  • Qualified long-term unemployment recipients

The IRS provides a form that employers can give to applicants in order for them to identify any targeted groups to which they belong.

Wages paid to some members of targeted groups may still not qualify for WOTC if the individual:

  • Is related to the employer.

  • Is a nonqualifying re-hire.

  • Works less than 120 hours.

Qualified wages

For the most part, WOTC is calculated based on qualified first-year wages. These are wages paid for services rendered during the one-year period starting on the day the employee begins work. The maximum amount of first-year wages that may be considered for WOTC is $6,000 per employee, with the following exceptions:

  • $1,200 for each new qualified summer youth employee

  • $12,000, $14,000, or $24,000 for qualified veterans, depending on the category under which the veteran qualifies. 

The credit is also available for up to $10,000 of qualified second-year wages paid to long-term TANF recipients.

Some wages are disqualified from the calculation, including:

  • Wages paid while the employer received payment for the employee from a federally funded on-the-job training program.

  • Wages for services of replacement workers during a strike or lockout.

WOTC calculation

Employers calculate the total WOTC for the year by adding three different wage categories:

  • 25 percent of qualified first-year wages for employees who worked at least 120 hours but fewer than 400 hours

  • 40 percent of qualified first-year wages for employees who worked at least 400 hours

  • 50 percent of qualified second-year wages of employees certified as long-term family assistance recipients

The employer must reduce the deduction for wages paid by the amount of WOTC in the year it is generated, even if some or all of the credit is unused in that year.

In conclusion

The credit is available for wages paid or incurred to a qualified individual who begins work for an employer on or before Dec. 31, 2019. WOTC has been scheduled to expire before only to be included in some type of “tax extenders” legislation from Congress. However, its history of near-expiration and extension shouldn’t keep employers from relying on it when it’s available.

Several special rules and qualifications may apply to certain taxpayers attempting to claim the credit. For more information on WOTC, please give us a call.