In its September 7, 2022, Tax Tip (Tip 2022-137), the IRS reminds employers of the sometimes overlooked work opportunity tax credit (WOTC). Extended through the end of 2025, the WOTC incentivizes businesses to hire individuals certified as members of ten groups that normally face significant obstacles to employment. These are:
• Recipients of Temporary Assistance for Needy Families (TANF);
• Qualified unemployed veterans;
• Formerly incarcerated individuals;
• Designated community residents living in Empowerment Zones or Rural Renewal Counties;
• Vocational rehabilitation referrals;
• Summer youth employees living in Empowerment Zones;
• Recipients of the Supplemental Nutrition Assistance Program (SNAP);
• Recipients of Supplemental Security Income (SSI);
• Long-term family assistance recipients; and
• Long-term unemployment recipients.
To take advantage of the WOTC, employers must first obtain certification that an individual is a member of one of these targeted groups. To do so, they should submit to their state’s workforce agency (SWA) (such as the New York State Department of Labor), within 28 days of the employee’s start date, IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit.
An employer must also submit to its SWA the appropriate U.S. Department of Labor Employment and Training Administration Form ETA. See https://www.dol.gov/agencies/eta/wotc/how-to-file.
After eligible employers receive certification that their employees qualify, the WOTC is generally limited to 40% of the first $6,000 paid to each eligible employee, resulting in a maximum WOTC of $2,400 per each eligible employee. Instructions for calculating the WOTC can be found here. The credit is obviously an incentive for a business to hire as many individuals from the ten groups above as possible—and thereby fulfil the aim of the WOTC, to provide jobs for individuals who employers might otherwise turn away. A business can claim the WOTC on its federal income tax return via Form 3800, General Business Credit.
There are limitations on how much WOTC can be claimed both by taxable businesses and qualified tax-exempt organizations. For a taxable business, the WOTC is generous and may be claimed up to the business’s income tax liability; any remaining credit is subject to the normal carry-back and carry-forward rules. For tax-exempt organizations, the credit is limited to the amount of the organization’s payroll tax for qualifying employees, who are in turn limited to qualified veterans who began work for the organization between 2020 and 2026. The WOTC for tax-exempt organizations is claimed on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.
View the full Tax Tip 2022-137 here.