The Work Opportunity Tax Credit (WOTC), a federal incentive for employers to hire workers from targeted disadvantaged groups, was extended through 2025.

Work Opportunity Tax Credit Background

Originally enacted in 1996, the WOTC has been revised and reauthorized numerous times, but was slated to expire at the end of 2020. The five-year extension means business owners can continue to benefit from hiring veterans, workers who have experienced long periods of unemployment and other targeted groups.

The qualifying groups of workers covered under the WOTC include qualified veterans, qualified ex-felons, workers referred from vocational rehabilitation programs, recipients of SNAP benefits, recipients of Supplemental Security Income (SSI), long-term family assistance recipients and qualified recipients of long-term unemployment benefits.

For the employer, the tax credit provides recovery of 25% of gross wages paid during a worker’s first year of employment, as long as the worker put in between 120 and 400 hours. For employees who worked more than 400 hours, employers can recoup up to 40 percent.

The maximum tax credit is $9,600 per qualified employee.

For a business owner to take advantage of the WOTC, qualified employees must:

  • Have received unemployment assistance from the government for 27 consecutive weeks.
  • Work a minimum of 120 hours during the prior year before businesses are eligible to claim the credit. The benefit won’t be seen in the first year of the worker’s employment on your tax return, but you’ll see the credit the following year.
  • If the credit exceeds your business’ tax liability, you can carry the credit backward or forward. Carryback or carryforward is available to pass-through entities including S-corporations, partnerships, and LLCs. For some, the credit may pass through to a business owner’s personal tax returns. If that’s your case, and if the credit exceeds your personal tax liability, it may also be carried forward or backward.

All businesses are eligible for the WOTC even though it’s the employees that must qualify in order for the business to claim the credit.  You should plan to maintain your existing hiring practices because you are required by law not to ask certain questions of applicants that would let you know about their qualifications and background.

On or before the day that a job offer is made, a pre-screening notice must be completed by the job applicant and the employer. This notice must then be filed with your state’s administering workforce agency, typically during a 28-day period of an employee’s date of hire.

Empowerment zones in Kansas are often referred to as Rural Renewal Counties. Learn if your county qualifies.

Additional Resources

Businesses often engage specialty firms to manage the complexity of the WOTC for them. You may be charged up to 25% of the credit amount to gain access to a firm’s expertise in the area, but outside experts are worth the investment. Considering the upside tax credit potential, the cost outweighs the potential for inadvertently missing a WOTC-qualified employee already working at your business.

Applying for the WOTC involves engaging a third-party screening company and asking your recruits to visit their website to answer a few qualifying questions during the onboarding process. This service is available to Adams Brown payroll clients. A more detailed explanation of the application process can be found here.

To learn more about the benefits of the WOTC for your business, contact an Adams Brown tax advisor.