Work Opportunity Tax Credit – Definition

Cite this article as:"Work Opportunity Tax Credit – Definition," in The Business Professor, updated May 14, 2019, last accessed October 27, 2020, https://thebusinessprofessor.com/lesson/work-opportunity-tax-credit-definition/.

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Work Opportunity Tax Credit Definition

The Work Opportunity Tax Credit (WOTC) refers to a business credit that employers are entitled to when they recruit from certain minority groups known to have specific employment barriers. The work opportunity tax credit is a separate and non-refundable credit.

Employers that hire disadvantaged workers or people with higher-than-average unemployment rates can claim this business credit. Also, the credit that employers receive is dependent on how much they pay these workers after recruiting them. Hence it is not just about hiring disadvantaged workers but paying qualified wage for the workers that entitle an employer to this federal tax credit.

A Little More on What is a Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) was established to increase employment opportunities for individuals in minority groups, usually groups with low employment rates. This Federal tax can only be enjoyed by employers that hire workers from certain targeted groups.

WOTC is premised on Form 5884 and has specific groups of workers that employers target such as  ex-felons, veterans, SSI recipients, high-risk youth, among others.

In the United States, there are many other programs aside from WOTC that promote access to jobs by workers from disadvantaged minority groups. These programs also provide incentives for employers that recruit these targeted workers.

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) affirms the eligibility of employer (who hire from targeted minority groups) to claim the Work Opportunity Tax Credit (WOTC). The targeted groups for WOTC are; vocational rehabilitation referral, long-term family assistance recipient, ex-felons, veterans, SSI recipients, Designated Community Resident (DCR), Qualified IV-A Recipient and some others.

An employer can only claim Work Opportunity Tax Credit (WOTC) if workers from targeted groups are hired by his organization. To be eligible for WOTC, pre-screening and certification is required. The employer is required to file a form 8850 which is Pre-screening Notice and Certification Request from for WOTC. This form must be filed immediately a worker from any targeted group begins work in an organization, this is usually with 28 days of resumption. Employers are expected to file the form with workforce agency in their state of operation.

Since there are eligibility criteria for before an employer is qualified to claim this business credit, the Work Opportunity Tax Credit (WOTC) also has certain limitations. The credit given to an employer is usually a percentage of the qualified wages paid to workers in the first year, the percentage can be as much as 40%.

WOTC is also limited to the amount of business income tax liability or social security tax that a business owes. In the case of a taxable business, an employer can decide to use the carryback and carryforward rules apply to apply credit against business income tax liability.

The Work Opportunity Tax Credit (WOTC) can be claimed using the form 5884-C, only qualified tax-exempt organizations can fill this form to claim their credit. The organization claiming the credit must have also hired an eligible employee from any of the target groups. Employers who do not meet the eligibility requirements of WOTC cannot fill Form 5884-C or claim the business tax.

Taxable employers are those who pay social security taxes and business income tax to the Internal Revenue Service (IRS) or any other authorised agency. Under the Work Opportunity Tax Credit (WOTC), taxable employers can claim the tax or business credit on Form 3800. This can only be done after the taxable employer secures the required certification. These employers file Form 5884, Form 3800 and related tax return forms (Forms 1040, 1041 and 1120) when claiming the credit.

Tax-exempt employers are those who have access to complete relief from taxes or enjoy reduced tax rates. Organizations or employers who qualify for tax-exempt under Sections 501 (a) and 501(c) of the IRC are eligible to claim tax credits under WOTC. the credit can only be claimed for workers hired from target groups who have worked after December 31, 2014, and those who work before January 1, 2020.

Once tax-exempt employers in this category have certification in Form 8850, they can file Form 5884-C (WOTC for qualified Tax-Exempt Employers to claim the credit. The credit claimed has no effect on the Social Security tax liability on the employment tax return.

References for Work Opportunity Tax Credit

Academic Research on Work Opportunity Tax Credit (WOTC)

The effects of an employer subsidy on employment outcomes: A study of the work opportunity and welfare‐to‐work tax credits, Hamersma, S. (2008). Journal of Policy Analysis and Management: The Journal of the Association for Public Policy Analysis and Management, 27(3), 498-520.

The work opportunity and welfare-to-work tax credits: Participation rates among eligible workers, Hamersma, S. (2003). National Tax Journal, 725-738.

The effects of hiring tax credits on employment of disabled veterans, Heaton, P. (2012). RAND NATIONAL DEFENSE RESEARCH INST SANTA MONICA CA.

Utilization of employment tax credits: An analysis of the empowerment zone wage tax credit, Hanson, A. (2011). Public Budgeting & Finance, 31(1), 23-36.

The Work Opportunity Tax Credit: A Fact Sheet, Levine, L. (1996). Congressional Research Service, Library of Congress.

Job Separation Behavior of WOTC Workers: Results from a Unique Case Study, Gunderson, J. M., & Hotchkiss, J. L. (2007). Social Service Review, 81(2), 317-342.

Improving the employment rate of ex-prisoners under parole, Rakis, J. (2005). Fed. Probation, 69, 7.

Not perfect, but still pretty good: the EITC and other policies to support the US low-wage labour market, Scholz, J. K. (2000). OECD Economic Studies.

Utilization of income tax credits by low-income individuals, Dickert-Conlin, S., Fitzpatrick, K., & Hanson, A. (2005). National Tax Journal, 743-785.

Utilization of Employment Tax Credits: An Analysis of Employees Eligible for the’Empowerment Zone’Wage Tax Credit, Hanson, A. (2006).

The Work Opportunity Tax Credit (WOTC) and the Welfare-to-Work (WtW) Tax Credit, Levine, L. (2005).

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