The Work Opportunity Tax Credit (WOTC) is one tool in a diverse toolbox of flexible strategies designed to help move people from welfare into gainful employment and obtain on-the-job experience. It joins other tax credits, education, and job training programs that help American workers with barriers to employment prepare for good jobs; ease their transition from job to job; benefit from the creation of effective regional economic development strategies; and create high performance workplaces.
WOTC promotes the hiring of individuals who qualify as members of target groups, by providing a federal tax credit incentive of up to $9,000 for employers who hire them. Individuals qualify according to their personal and family status and the location of their residence.
Residence becomes important in qualifying for tax credits in government designated Empowerment Zones (EZs), Enterprise Communities (ECs), or Renewal Communities (RCs). The RC/EZ/EC Initiative is vital to development in more than 100 distressed urban and rural areas nationwide. The Initiative, through a combination of innovative tax incentives, federal grants, and partnerships with government, for-profit and non-profit agencies, has opened new businesses and created jobs, housing, and new educational and healthcare opportunities for thousands of Americans. The determination as to whether a prospective employee in fact resides in such a zone and would qualify is a complex undertaking.
Have the applicant complete Form 8850 upon or before offering employment. The Individual Characteristics Form, ETA 9061 is completed by the employer or the employer’s agent.
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The forms are then mailed within 28 days of the hire date to the individual state agency responsible for administering the program. Failure of the employer to send the form within 28 days will result in denial of certification with no right to appeal. A state examiner will then determine the eligibility of the applicant. If the applicant is found eligible a certification notice is provided to the employer.
Each category has a set of complex rules that must be followed in order to claim a tax credit. For example:
- The employee must be retained 400 hours for a 40 percent tax credit on qualified first year wages up to $6,000.
- For the employee that is retained at least 120 hours but less than 400 hours a 25 percent credit is available on qualified first year wages up to $6,000.
- An exception is qualified summer youth (target group F). The tax credit is based on qualified first year wages up to $3,000.
- Long-term family assistance, target group I, provides for a tax credit of 40 percent on qualified first year wages up to $10,000 and 50 percent on the second year of qualified wages up to $10,000. For the employee that is retained at least 120 hours but less than 400 hours, a 25 percent tax credit is available on qualified first year wages up to $10,000.
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Category A (Welfare Recipients) - Any individual who has received financial benefits under the AFDC (Aid to Families with Dependent Children) or the successor program, TANF (Temporary Aid to Needy Families). The employee must have received at least any 9 months of benefits within an 18 month period dating back from their hire date. Medicaid or Medicare are not qualifying IV-A benefits. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category B-1 (Veteran Food Stamps) - Veterans who are members of a family that received food stamps for at least three consecutive months during the 15 months prior to date of hire. Documentation such as the Veterans DD 214 or other forms of official documentation is needed to establish proof of service. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category B-2 (Disabled Veterans) - An expansion of the Veterans targeted group which includes a Veteran who is certified as entitled to compensation for a service-connected disability and having a hire date which is not more than one year after having been discharged or released from active duty in the Armed Forces of the United States or having been unemployed for six months or more (whether or not consecutive) during the one year period prior to the hire date. A service-connected disability is defined as having a disability rating of 10 percent or higher according to Section 101 of Title 38, U.S.C. Qualified first- year wages for this category are $12,000.
Category C (Ex Felons) - An individual who has been convicted of a felony and/or has been released from incarceration within the previous 12 months from date of hire. If the individual was sentenced directly to probation, work release, community corrections without being incarcerated, a letter from the case worker, parole officer, or halfway house to document the status is required. Date of birth is necessary for this category. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category D (Designated Community Residents-DCR) - A DCR is an individual that is certified by the SWA/DLA as having attained the age of 18 but not 40 on the hire date and his /her principal place of abode is within an EZ, RC or Rural Renewal County. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category E (Vocational Rehabilitation) - Any person who is currently receiving rehabilitative services, or has completed services within 2 years of the hire date. These individuals need to have an IWPE (Individualized Written Plan of Employment) to support those services rendered under the Rehabilitation act of 1973 or under Chapter 31 of Title 38, U.S. Code. This now includes work plans that have been developed and implemented through an Employment Network. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
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Category F (Summer Students) – Covers qualified summer youth ages 16 through 17 on the hiring date who reside in an Empowerment Zone, Enterprise Community, or Renewal Community. The period of employment is between May 1 and September 15. Category F students must not have been employed by the same employer prior to the 90 day (summer) period between May 1 and September 15. Wages paid for services performed while the student lived outside the zone do not qualify. However, in the event an individual, who was a “Qualified Summer Youth” employee meets the eligibility criteria for another target group, that individual may be recertified, and qualify the employer to claim the remainder balance of the one-year tax credit. The total period of eligibility for the credit, including the time the individual is certified as a “Qualified Summer Youth” employee, cannot exceed one year.
The tax credit for this target group is calculated at a rate of 25% of the qualified first year's wages up to $3,000. This allows a maximum credit amount of $750. For those employees working at least 400 hours or more, the credit is calculated at the rate of 40% of the qualified wages up to $3,000 for a maximum tax credit of $1,200.
Category G (Food Stamps) - Any individual who is 18 thru 39 years old and is a member of a family that is receiving Food Stamps. The recipient must have received 6 continuous months of benefits under the Food Stamp Act of 1977 dating back from the hire date. In addition, the recipient can qualify by being an able-bodied adult without dependents if they received 3 continuous months of Food Stamps within the previous 5 months dating back from the hire date. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category H (SSI Recipients) - Individuals who received Supplemental Security Income benefits for any month during the 60 days prior to date of hire. This tax credit for new hires employed 400 or more hours is 40% of qualified wages for the first year of employment; the credit for new hires employed 120 to 399 hours is 25%. Qualified wages are capped at $6,000.
Category I (Long Term TANF Recipients) - Formerly referred to as the Welfare to Work Credit. This tax credit has merged under the WOTC Tax Credit by Bill HR2206. Long Term TANF recipient who is a member of a family that received Temporary Assistance for Needy Families (TANF) for at least 18 consecutive months ending on the hire date, or a member of a family whose TANF eligibility expired under Federal or State law after August 5, 1997 and no more than 2 years before the hire date, or whose family received TANF for any 18 months after August 5, 1997 and the 18th month of benefits ended no more than 2 years before the hire date. The tax credit for category I new hires employed 400 or more hours or 180 days is 40% of qualified wages for the first year of employment and 50% for the second year. Qualified wages are capped at $10,000 per annum; they include tax-exempt amounts received under accident or health plans as well as educational assistance and dependent assistance programs.
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