Work Opportunity Tax Credit
Author: Bob Johnson Jr
Currently available through 2019, the Work Opportunity Tax Credit (WOTC) program offers employers federal income tax credits to hire individuals from a growing list of designated groups. The WOTC has been used to pump credit dollars into disaster areas, encourage residents to stay in distressed geographic areas—Empowerment Zones, Renewal Communities and Rural Renewal Counties—help disadvantaged people support themselves, encourage hiring of hard-to-employ individuals and assist groups that have served in the U.S. military. Designated groups include:
- Family members receiving Temporary Assistance to Needy Families (TANF) program benefits
- Qualified veterans
- Qualified ex-felons
- Vocational rehabilitation referrals
- Residents ages 18 to 39 of Rural Renewal Counties, Empowerment Zones and Renewal Communities
- Long-term TANF recipients
- Qualified food stamp recipients
- Qualified summer youth employees
- Qualified Supplemental Security Income recipients
- Qualified long-term unemployment recipients
The credit amount is based on a percentage (typically 40 percent) of wages paid to the qualified employee, and for most designated categories, it’s a maximum of $2,400 per qualified employee. However, the maximum credit can be as much as $4,800 for certain qualified veterans and $9,000 for long-term TANF recipients. Unlike most other federal income tax credits, the WOTC also can be applied against alternative minimum tax. Unused credits can be carried forward up to 20 years to use against future income tax liabilities. Tax-exempt organizations also may benefit from the WOTC via a payroll tax credit for wages paid to qualified veterans.
A common concern expressed by businesses is the personal nature of questions asked on the forms, raising claims of potential discrimination. In a letter dated July 29, 2010, the Equal Employment Opportunity Commission (EEOC) Office of Legal Counsel specifically addressed whether WOTC questions conform to federal equal employment opportunity laws and the Americans with Disabilities Act of 1990. The EEOC concluded that IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, follows EEOC guidance since the form notes the information is covered by the IRS confidentiality provision; the form is voluntary, and its use is to assist individuals of targeted groups in securing employment. Therefore, an employer’s use of the WOTC forms is not discriminatory within the federal guidelines.
Employers who frequently hire new employees or are in a Rural Renewal County, Empowerment Zone or Renewal Community should consider implementing Form 8850 as part of the hiring process. Many applicants may not know they’re part of a designated group and could potentially create a credit for the employer.