Employers Can Earn a Tax Credit Equal to 40% of a New Hire’s First-Year Wages

The Internal Revenue Service (IRS) is reminding employers planning to hire new workers that the Work Opportunity Tax Credit (WOTC) may be available to those who hire long-term unemployment recipients and others certified by their state workforce agency.

WOTC Explained
The WOTC encourages employers to hire certain designated categories of workers. Employers generally can earn a tax credit equal to 25% or 40% of a new employee’s first-year wages, up to the maximum for the target group to which the employee belongs. The maximum tax credit amounts depend on the wages paid to the new hire, the new employee’s target group, and the number of hours worked during the first year of employment. Click here for specific amounts and calculations.

Eligible businesses claim the WOTC on their income tax return. The credit is first figured on IRS Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

How to Qualify for the WOTC
To qualify for the credit, an employer must first request certification by filing IRS Form 8850 with its state workforce agency within 28 days after the eligible worker begins work. Other requirements and further details can be found in the instructions to IRS Form 8850.

There are 10 categories of WOTC-eligible workers, including:

  • Qualified long-term unemployment recipients (who have been unemployed for at least 27 weeks and received state or federal unemployment benefits during part or all of that time)
  • Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans, including disabled veterans
  • Ex-felons
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Food stamp (SNAP) recipients
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients

Employers may use the U.S. Department of Labor’s WOTC Calculator to see how much they can earn in tax credits.

Our section on Employment Taxes features summaries of various employment taxes and related resources from the IRS.

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