Definition
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from specific targeted groups who have consistently faced significant barriers to employment. The credit is intended to provide an incentive to employers to hire individuals from these groups. Typically, employers can claim a tax credit equating to 40% of the first $6,000 ($3,000 for qualified summer youth employees) of qualified wages paid to each employee, provided they are retained for a minimum of 400 hours. If the employee works at least 120 hours but less than 400 hours, the credit is reduced to 25%.
Examples
- Veterans with Service-Connected Disabilities: An employer hires a veteran who has a disability related to their service. The veteran works over 400 hours in the first year. The employer can claim 40% of the first $6,000 of wages paid to the veteran, resulting in a maximum credit of $2,400.
- Qualified Summer Youth Employee: An employer hires a high school student for the summer, and the student is part of a targeted group. If the student works 300 hours over the summer, the employer may claim a 25% credit of the first $3,000 in wages, up to $750.
- Long-Term Unemployment Recipient: An employer hires an individual who has been unemployed for at least 27 consecutive weeks. The employee works 450 hours in the first year. The employer can claim a credit of 40% of the first $6,000 of wages, up to $2,400.
Frequently Asked Questions (FAQs)
What are the targeted groups under the WOTC?
- Veterans: Including those with service-connected disabilities and unemployed veterans.
- Ex-Felons: Individuals who have felony convictions.
- Designated Community Residents: Individuals aged 18-40 residing in Empowerment Zones or Rural Renewal Counties.
- Vocational Rehabilitation Referrals: Individuals referred to an employer by a rehabilitation agency.
- Summer Youth Employees: Youths aged 16-17 residing in Empowerment Zones or Rural Renewal Counties.
- SNAP Recipients: 18-39-year-olds receiving SNAP benefits.
- Supplemental Security Income (SSI) Recipients.
- Long-Term Family Assistance Recipients.
- Long-Term Unemployed: Individuals unemployed for 27 weeks or more.
How do employers claim the WOTC?
Employers must submit IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to their State Workforce Agency within 28 days of the employee’s start date. Once certified, the employer includes the credit on their annual business income tax returns.
Is there a cap on the number of employees an employer can claim WOTC for?
No, there is no cap on the number of employees. However, the credit limit per eligible employee remains in place.
Can the WOTC be carried forward or back?
Yes, if the employer’s WOTC exceeds the amount of income tax owed for that year, they can carry the unused credit back one year or forward 20 years.
Are there limitations on types of wages that qualify for WOTC?
Yes, qualified wages do not include wages subsidized by other federal programs or certain training programs.
Related Terms:
- Tax Credit: A provision that allows taxpayers to subtract the amount of the credit from their total tax liability.
- Qualified Wages: Wages paid or incurred to a targeted employee that meet all specific criteria set for the WOTC.
- Empowerment Zones: Designated areas that provide tax incentives and grants to spur economic development.
- IRS Form 8850: The form used by employers to pre-screen and certify employees for the WOTC.
Online References:
Suggested Books for Further Study:
- “Federal Taxation: Comprehensive Topics” by Ephraim P. Smith, Philip J. Harmelink, and James R. Hasselback.
- “Taxes and Business Strategy” by Myron S. Scholes and Mark A. Wolfson.
- “U.S. Master Tax Guide” by CCH Tax Law Editors.
Fundamentals of Work Opportunity Tax Credit (WOTC): Taxation Basics Quiz
Thank you for engaging in this interactive quiz on the Work Opportunity Tax Credit (WOTC). This tax incentive is crucial for fostering diverse workplace environments and aiding underrepresented groups in obtaining employment.
