The Work Opportunity Tax Credit (WOTC) is a federal tax credit offered to employers who hire employees from various economically disadvantaged populations. The WOTC was first introduced by the Small Business Job Protection Act of 1996. Various extensions have kept this act in existence. In 1997, the act was extended by the Taxpayer Relief Act of 1997. Further extensions include the Job Creation and Worker Assistance Act of 2002, and the Working Families Tax Relief Act of 2004.

In December of 2006, Congress passed the Tax Relief and Heath Care Act of 2006. The provision retroactively extended the WOTC through 2006. In 2007, the provision combines the Welfare-to-Work (WTW) tax credit with the WOTC and extends both through Dec. 31, 2007.

For an employer to benefit from the WOTC, it must determine whether its new hires come from one of the following groups:

• Qualified welfare recipients.
• Qualified food stamp recipients.
• Qualified Supplemental Security Income recipients.
• Qualified veterans.
• Qualified ex-felons.
• Vocational rehabilitation referrals.
• Qualified summer youth workers.
• High-risk youths.
• Eligible work incentive employees.

To determine whether a new hire is an individual from one of the targeted groups, the “Pre-Screening Notice and Certification Form for the Work Opportunity and Welfare-to-Work Credits,” the IRS Form 8850 , must be completed on or before the date a job offer is made. Although the WOTC is a federal program, it is administered by each state, and some of the administrative processes may vary depending on the state.

If it is found that the new hire is from a targeted group, the employer may then need to send the form to the state WOTC coordinator within 28 days after the employee begins work. For employees who have been conditionally certified, the “Conditional Certification” form, ETA Form 9062 , may need to be completed. For employees who have not been conditionally certified, the “Individual Characteristics Form,” ETA Form 9061 , may need to be considered instead. Please check with the state WOTC coordinator for additional information and guidance.

When the company files its taxes, it should complete the IRS Form 5884 , (use the appropriate year when filing) to take the tax credits for the employees who qualify. The value of the tax credit is 40 percent of the first $6,000 of wages paid the first year to a certified employee who works at least 400 hours. For employees who work less than 400 hours but more than 120 hours, the tax credit is 25 percent of the first $6,000. For youth hired for summer work, the percentage is applied to the first $3,000.

 
Please Note: This material is provided as general information and is not a substitute for legal or other professional advice. Contact the Knowledge Center for more information.
 

Express Request
SHRM’s Express Request (ER) service allows members to request and receive resources on over 100 timely HR topics via e-mail. Available Express Requests are listed on the web site, and responses are sent immediately.