Walter & Shuffain - Certified Public Accountants & Business Advisors

Don’t forget about the Work Opportunity Tax Credit

Note: Congress is considering proposals that could expand the Work Opportunity Tax Credit for certain qualified groups. We will monitor this development and communicate updates as necessary.

As a business, tax planning can help create increased cash flow that allows management to expand, increase wages, bring in new inventory, and achieve other goals that require more financial flexibility. Business owners often go to tax credits involved with normal business operations but sometimes overlook human resource tax credits. One such tax credit is the Work Opportunity Tax Credit (WOTC).

This hiring-based tax credit was recently extended until Dec. 31, 2025, by the Consolidated Appropriations Act of 2021. Keep reading to learn how to use the WOTC.

What is the WOTC?

The WOTC is an employment-based tax credit the federal government offers to employers who hire from qualified groups and is based on wages paid to qualified employees.

While there is an extensive list of qualified groups a new employee may come from, they most often include groups that otherwise would be overlooked, including veterans, ex-felons, those graduating from rehabilitation programs, and individuals on certain state or federal government assistance programs. You can view the extended list here.

What credits can be taken?

The WOTC allows employers who hire from qualified groups to receive a tax credit for wages paid up to the specified maximum amounts, as shown below.

 

Employee Category Credit Amount Maximum Wages

Qualified employees working 120+ hours a year

25% of first-year wages

$6,000 maximum wages used in calculation of credit

Qualified employees working 400+ hours per year 40% of first-year wages $6,000 maximum wages used in calculation of credit
Temporary Assistance for Needy Families (TANF) recipients working 400+ hours per year

40% of first-year wages

50% of second-year wages
$6,000 maximum wages used in calculation of credit
Qualified veterans 25% of first-year wages for employees working 120+ hours a year; 40% of first-year wages for employees working 400+ hours per year $24,000 maximum wages used in calculation of credit
Rehires 0% Rehires are not eligible for the WOTC

Claiming the WOTC

There are several steps businesses need to take to claim the WOTC. Both employer and applicant must complete Form 8850 before or on the date an employment offer is made. That form must then be filed with the appropriate state workforce agency within 28 days of the start of work.

The state workforce agency will confirm whether the employee is considered part of a qualified group for the WOTC. If so, the employee can then submit Form 5884 and Form 3800 with their income tax returns to take the appropriate credit amount.

For assistance understanding the WOTC and the nuances involved in calculating the appropriate credit amounts, reach out to our team of tax professionals.