The work opportunity tax credit (WOTC) provides a reduction in income taxes for employers who hire individuals from targeted groups.
Hiring from targeted groups
The first step toward claiming the WOTC is to hire individuals from specific “targeted groups.” The IRS maintains a complete list of targeted groups on its website, including:
- A member of a family receiving assistance under a state plan approved under the federal Social Security Act’s Temporary Assistance for Needy Families (TANF) rules.
- Qualified veterans, including:
- 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 recipients of Supplemental Nutrition Assistance Program (SNAP) benefits.
- Recipients of federal Supplemental Security Income.
- Qualified long-term unemployment recipients.
In order to qualify for the credit, an employer needs to certify that the new hire is a member of a targeted group.
This is completed by filing certification forms with the applicable state workforce agency within 28 calendar days from the date the individual begins working for the organization.
For the most part, the 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 the 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 Temporary Assistance to Needy Families (TANF) recipients.
Some wages may be 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.
- Wages paid to an employee who’s related to the employer.
- Wages paid to a nonqualifying rehired individual.
- Wages paid to an individual who works less than 120 hours.
Employers calculate the total WOTC for the year by adding three different wage categories:
- 25% of qualified first-year wages for employees who worked at least 120 hours but fewer than 400 hours
- 40% of qualified first-year wages for employees who worked at least 400 hours
- 50% of qualified second-year wages of employees certified as long-term family assistance recipients
The employer must reduce the corresponding deduction for wages paid by the amount of WOTC in the year it’s generated, even if some or all of the credit is unused in that year.
The credit is available for wages paid or incurred to a qualified individual who begins work for an employer on or before Dec. 31, 2025. The 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 the WOTC, please give us a call.