The Work Opportunity Tax Credit (WOTC) was first introduced by the Small Business Job Protection Act of 1996. Its intent was to provide employers with an incentive to reach out and hire employees from economically disadvantaged populations. As the program demonstrated its success in increasing employer’s participation, there has been a succession of federal acts to keep this tax credit in existence. 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 combined the Welfare-to-Work (WTW) tax credit with the WOTC and extended 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 help you 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. The HR eBook will have a listing of all state coordinators to help you locate the state specific information you’ll need!
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 $3000.
While filing federal forms might seem intimidating and time consuming, the effort can be well worth it. It can add up to a real win—for your business and for your community!