In a challenging job market, the Work Opportunity Tax Credit (WOTC) may give employers a helping hand. The WOTC is available to employers that hire designated categories of workers who face significant barriers to employment. WOTC is a workforce program that incentivizes workplace diversity and facilitate access to good jobs for American workers.
The WOTC tax credit for that is worth as much as $2,400 for each eligible employee, and up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans. The tax credit has been extended until December 31, 2025 by the Consolidated Appropriations Act, 2021.
The work opportunity tax credit is available on an elective basis for employers hiring individuals from one or more of 9 targeted groups.
Work Opportunity Tax Credit Targeted Groups
Generally, an employer is eligible for the work opportunity tax credit only for qualified wages paid to members of a targeted group, which are:
- Qualified IV-A Temporary Assistance for Needy Families (TANF) program recipients
- Qualified veterans
- Qualified ex-felons
- Designated community residents
- Vocational rehabilitation referrals
- Qualified summer youth employees
- Qualified food stamp recipients of the Supplemental Nutritional Assistance Program (SNAP)
- Qualified Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Qualified long-term unemployed individuals
For each employee, there is also a minimum requirement that the employee must have completed at least 120 hours of service for the employer.
Also, the credit is unavailable for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (e.g., working as a maid in the employer’s home). Additionally, the credit generally isn’t available for employees who have previously worked for the employer.
WOTC Credit Calculation and Maximum Credits
For employees other than summer youth employees, the credit amount is calculated under the following rules:
- The employer can take into account up to $6,000 of first-year wages per employee (up to $24,000 in wages may be taken into account for certain qualified veterans).
- If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%.
- If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%.
Under the above rules, the maximum credit available for the first-year wages is $2,400 ($6,000 × 40%) per employee; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 40%] for certain veterans.
Summer Youth Employee Rules for WOTC
For summer youth employees, the rules above apply, except that the employer can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and Sept. 15. Thus, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee.
Other Tax Considerations for Work Opportunity Tax Credit
You should be aware that:
- No deduction is allowed for the portion of wages equal to the amount of the work opportunity credit determined for the tax year
- Other employment-related credits are generally reduced with respect to an employee for whom a work opportunity credit is allowed
- The credit is subject to the overall limitations on the amount of business credits that can be taken in any tax year, but a 1-year carryback and 20-year carryforward of unused business credits is allowed.
Because of these three rules, there may be circumstances in which the employer might, under an available election, elect not to have the work opportunity credit apply.
Also important to note are some additional rules that exist which, in limited circumstances, prohibit the credit or require an allocation of the credit.
We welcome your questions about the Work Opportunity Tax Credit.
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