Two IRS Publications Tout Work Opportunity Tax Credit

Two IRS publications recently discussed the benefits of the Work Opportunity Tax Credit (WOTC) for employers (SSA/IRS Reporter, 3rd Quarter 2023; IRS Congressional Update, November 2023).

The WOTC is a general business credit provided under Code Sec. 51 that is jointly administered by the IRS and US Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025.

The WOTC may be claimed by any employer that hires and pays or incurs wages to certain individuals who are certified by a designated local agency (sometimes referred to as a state workforce agency) as being a member of one of 10 targeted groups. In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:

• is in their first year of employment;
• is certified as being a member of a targeted group; and
• performs at least 400 hours of services for that employer.

The maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer. Up to $24,000 in wages may be taken into account in determining the WOTC for certain qualified veterans.

An employer cannot claim the WOTC for employees who are rehired. In general, taxable employers may carry the current year’s unused WOTC back one year and then forward 20 years.

An employer must pre-screen and obtain certification from the appropriate State Workforce Agency (SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, both the job applicant and employer must complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity

After the required certification is received, taxable employers claim the credit as a general business credit on Form 3800, General Business Credit, against their income tax. These employers attach Form 5884, Work Opportunity Tax Credit, to the employer’s business-related income tax return.

Tax-exempt employers claim the credit against the employer’s share of Social Security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. These employers file Form 5884-C after filing the related employment tax return for the period for which the credit is claimed.

According to DOL statistics, SWAs issued nearly 2.6 million WOTC certifications in fiscal year 2022. From fiscal year 2018 through fiscal year 2022, this was the highest number of certificates issued.

This article previously appeared in Checkpoint’s Payroll Update.

For more information about the Work Opportunity Tax Credit, see Checkpoint’s Federal Tax Coordinator ¶ L-17775, et seq.