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Requirements to Qualify for the Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a valuable federal tax credit available to employers who hire individuals from specific target groups facing employment challenges. By offering this credit, the government incentivizes businesses to give opportunities to workers who may have difficulty finding jobs. However, there are several specific requirements to qualify for this credit. In this blog, we’ll go over the key eligibility criteria, credit amounts, and how to claim the WOTC on your tax return.

Eligibility Requirements for WOTC

To qualify for the WOTC, an employer must meet certain requirements regarding the employee and their work hours:

  1. Targeted Employee Groups: The WOTC applies only to employees from designated groups, including veterans, long-term family assistance recipients, summer youth employees, and others. Each group has different criteria for eligibility.
  2. Hours of Service: Each eligible employee must complete a minimum of 120 hours of service for the employer within the tax year to qualify for the credit. If the employee works 400 hours or more, the maximum credit can be claimed for that employee.
  3. Employee Relationship: Employees related to the employer, such as family members, or those who previously worked for the employer, do not qualify for the WOTC. This rule ensures that the credit only applies to new, unrelated hires.

Credit Amounts by Employee Category

The WOTC credit amount varies depending on the type of employee and the number of hours they work:

  • General Credit: For most employees, the maximum first-year WOTC is $2,400 per employee.
  • Long-Term Family Assistance Recipients: For these employees, the maximum credit is higher—$4,000 for the first year of wages and a 50% credit on up to $10,000 of second-year wages, resulting in a total maximum of $9,000 over two years.
  • Veterans: Veterans may qualify for higher WOTC amounts. Depending on factors such as disability status and the duration of unemployment before being hired, the credit may be $4,800, $5,600, or even $9,600 per qualified veteran.
  • Summer Youth Employees: Wages for summer youth employees must be paid for services performed during any 90-day period between May 1 and September 15. The maximum credit for these employees is $1,200 per eligible worker.

Claiming the WOTC on Your Federal Tax Return

To claim the WOTC, an eligible employer must:

  1. Pre-Screen Employees: Complete IRS Form 8850, “Pre-Screening Notice and Certification Request,” by the date the employee is offered a job. This form must be submitted to the state workforce agency within 28 days of the employee’s start date.
  2. Submit Form 5884: Employers claim the WOTC on their federal income tax return by filing IRS Form 5884, “Work Opportunity Credit.” The credit amount can reduce the business’s income tax liability but cannot exceed it. Any unused WOTC may be carried back one year or forward up to 20 years.

Additional Rules and Limitations

While the WOTC can be highly beneficial, there are some circumstances where it may not apply or may need to be adjusted:

  • Election to Forgo the Credit: In certain cases, employers may elect not to claim the WOTC.
  • Credit Prohibition or Allocation: There are specific rules that may prevent employers from claiming the WOTC or require the credit to be allocated if certain conditions are met.

Conclusion

For employers hiring from targeted groups, the WOTC can be an excellent opportunity to reduce tax liability while supporting individuals facing employment challenges. If you’re interested in learning more about the WOTC or need assistance in claiming the credit, contact Guerrero CPA at 210-490-7100. Our team is ready to help you navigate the eligibility requirements, paperwork, and additional details to maximize your tax benefits.