Work Opportunity Credit
Employers may elect to claim a WOTC for 40% of first-year wages, up to $6,000 (more for certain targeted groups) per employee, for hiring workers from one of several targeted groups. Thus except for those targeted groups with higher allowable creditable wages, the maximum credit is $2,400 (40% of $6,000). First-year wages are wages paid during the tax year for work performed during the one-year period beginning on the date the target group member begins work for the employer.
For the full credit (40%), the targeted employee must work for a minimum of 400 hours in the first year. For those that work between 120 and 399 hours the credit percentage is reduced to 25%.
Coordination with Employee Retention Credit
An employer is not allowed an employee retention credit with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee. (Cares Act Sec. 2301(h)(1)) Targeted groups include:
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Veterans - A qualified veteran is a veteran who is certified by the designated local agency as falling within one of the following categories:
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Veteran Who is a Member of a Family Receiving Food Stamps for at least Three Months - The individual is a member of a family receiving assistance under a food stamp program under the Food and Nutrition Act of 2008 for at least three months, all or part of which is during the 12-month period ending on the hiring date. The maximum qualifying first-year wage taken into account is $6,000. Thus, the maximum WOTC is $2,400 (.4 x $6,000) (Code Sec. 51(d)(3)(A)(i))
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Veteran Entitled to Compensation for a Service-Connected Disability Hired Within First Year after Separation from Service - The veteran must be entitled to compensation for a service-connected disability and have a hire date that isn’t more than one year after having been discharged or released from active duty. The maximum qualifying first-year wage taken into account is $12,000., Thus, the maximum WOTC is $4,800 (.4 x $12,000) (Code Sec. 51(d)(3)(A)(ii)(I))
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Veteran Entitled to Compensation for a Service-Connected Disability with Six Months of Unemployment in the Year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date that equal or exceed six months. The maximum qualifying first-year wage taken into account is $24,000., Thus, the maximum WOTC is $9,600 (.4 x $24,000) (Code Sec. 51(d)(3)(A)(ii)(II))
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Veteran Has Aggregate Periods of Unemployment Exceeding Four Weeks in the year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed four weeks (but less than six months). The maximum qualifying first-year wage taken into account is $6,000., Thus, the maximum WOTC is $2,400 (.4 x $6,000) (Code Sec. 51(d)(3)(A)(iii))
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Veteran Has Aggregate Periods of Unemployment Exceeding Six Months in the Year Preceding the Hire Date - The veteran has aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed six months. The maximum qualifying first-year wage taken into account is $14,000. Thus, the maximum WOTC is $5,600 (.4 x $14,000) (Code Sec. 51(d)(3)(A)(iv))
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Recipients of Temporary Assistance for Needy Families (TANF) program – The assistance must be received for any 9 months during the 18-month period ending on the hiring date. The maximum qualifying first-year wage taken into account is $6,000, and thus the maximum WOTC is $2,400 (.4 x $6,000).
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Long-Term Family Assistance (TANF) Recipients - The first-year wages considered for this group is $10,000 with a maximum credit of $4,000 per employee., In addition, this group qualifies for second year credit equal to 50% of up to $10,000 of the second-year wages., A qualified individual is one who is a member of a family that:
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Has received temporary assistance for needy families (TANF) payments for at least 18 consecutive months ending on the hiring date, or
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Receives TANF payments for any 18 months (whether or not consecutive) beginning after August 5, 1997, and the earliest 18-month period beginning after August 5, 1997, ended during the past 2 years, or
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Stopped being eligible for TANF payments because federal or state law limits the maximum period such assistance is payable, and the individual is hired not more than 2 years after such eligibility ended.
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For the following groups, unless noted otherwise the maximum qualifying first-year wage taken into account is $6,000, and thus the maximum WOTC is $2,400 (.4 x $6,000):
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Long-term unemployed individuals (unemployed 27 consecutive weeks) hired after 2015.
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Qualified ex-felon - An individual who has been convicted of a felony under any federal or state law and is hired not more than 1 year after the conviction or release from prison for that felony.
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Vocational rehabilitation referral - An individual who has a physical or mental disability resulting in a substantial handicap to employment and who was referred to the employer upon completion of (or while receiving) rehabilitation services by a rehabilitation agency approved by the state, an employment network under the Ticket to Work program, or the Department of Veterans Affairs.
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Summer youth employee - An individual who:
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Performs services for the employer between May 1 and September 15
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Is age 16 but not yet age 18 on the hiring date (or if later, on May 1)
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Has never worked for the employer before, and
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Lives within an empowerment zone.
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The maximum amount of qualified first-year wages that may be taken into account for a summer youth employee is $3,000, and thus the maximum WOTC is $1,200 if the employee works 400 hours or more.
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Supplemental Nutrition Assistance Program (SNAP) recipient., An individual who:
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Is at least age 18 but not yet age 40 on the hiring date, and
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Is a member of a family that—
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Has received SNAP benefits for the 6-month period ending on the hiring date or
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Is no longer eligible for such assistance under section 6(o) of the Food and Nutrition Act of 2008, but the family received SNAP benefits for at least 3 months of the 5-month period ending on the hiring date.
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SSI recipient - An individual who is receiving supplemental security income benefits under title XVI of the Social Security Act (including benefits of the type described in section 1616 of the Social Security Act or section 212 of Public Law 93-66) for any month ending during the 60-day period ending on the hiring date.
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Designated community residents - These are individuals certified by the designated local agency as having attained age 18 but not age 40 on the hiring date, and as having their principal place of abode within an empowerment zone, enterprise zone, renewal community or rural renewal county. Wages that qualify for the WOTC don't include wages paid or incurred for services performed while the individual's principal place of abode is outside an empowerment zone or rural renewal county. (Code Sec. 51(d)(1) and Code Sec. 51(d)(5))
Qualified Zones, Communities and Counties
Refer to the list of designated areas available in the instructions to IRS Form 8850.
Certification Process
To be eligible to claim a WOTC, an employer files Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) with the State Workforce Agency (SWA) no later than the 28th day after the potentially eligible employee begins work. Then, after the worker is state certified as being a member of a targeted group and puts in sufficient hours, the employer claims the WOTC on Form 5884 (Work Opportunity Credit).
Form 8850 Transitional Filing Relief
Notice 2021-43 provides certain transitional relief for the 28-day filing requirement for Form 8850 related to the Designated Community Resident targeted group or the Qualified Summer Youth Employee targeted group.
Fast-Tracked Certification for Veterans
A veteran will be treated as certified by the designated local agency as having aggregate periods of unemployment meeting the requirements of:
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Code Sec. 51(d)(3)(A)(ii)(II) or Code Sec. 51(d)(3)(A)(iv), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than six months during the 1-year period ending on the hiring date.
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Code Sec. 51(d)(3)(A)(iii), if he or she is certified by the local agency as being in receipt of unemployment compensation under State or Federal law for not less than four weeks (but less than six months) during the 1-year period ending on the hiring date.
Other Issues
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No credit is allowed for an employee who is related to the employer or to certain owners of the employer, or who is a dependent of the employer.
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Claiming the WOTC may also impact the availability of certain other employment related tax credits.
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The credit is generally not available for employment of prior employees or replacements for employees on strike or locked out and employees who are receiving federally funded on-the job-training.
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This credit is part of the general business credit and subject to its limitations and carryover provisions., See chapter 9.00 for details of the general business credit.
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No credit is allowed for wages paid or incurred in carrying on a cannabis (marijuana) business, even if the employees hired are from the groups targeted by the WORC. This is because of Sec 280E, which denies a deduction for ordinary business expenses and credits for businesses trafficking in controlled substances. (Chief Counsel Advice Memorandum 202205024). See Chapter 3.28 for more information about cannabis businesses and Sec 280E.
Tax-Exempt Employers Qualify for the Credit
A tax-exempt employer may claim a credit for the WOTC it could claim for hiring qualified veterans if it were not tax-exempt. The credit is claimed by completing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, filed separately from any other return. The credit is allowed against the OASDI (Social Security) tax that the exempt employer would otherwise have to pay on the wages of all its employees during the one-year period beginning with the day he or she goes to work for the tax-exempt organization and cannot exceed the OASDI tax for that one-year period.
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Other limits applicable to tax-exempt employers:
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The general credit percentage of qualifying first-year wages is 26% (instead of 40%).
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The credit percentage of qualifying wages is 16.25% (instead of 25%) for a qualified veteran who has completed at least 120, but less than 400, hours of service for the employer.
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The tax-exempt employer may only take into account wages paid to a qualified veteran for services in furtherance of the activities related to the purposes or function constituting the basis of the organization's Sec. 501 exemption.
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California Differences
While California does not conform to the federal WOTC, the state does have its own version of hiring incentives that are explained in Chapter 9.19.