Work Opportunity Tax Credit (WOTC)
Overview
The Work Opportunity Tax Credit (WOTC) is the fourth-largest federal tax credit program, designed to stimulate job creation and economic growth. By reducing hiring costs, WOTC encourages businesses to expand their workforce while supporting broader economic stability. The government uses it as a tool to lower unemployment and increase workforce participation, while companies benefit from financial incentives that make strategic hiring more sustainable. As regulations evolve, businesses that leverage WOTC effectively can maximize savings while aligning with long-term economic policy goals.
Claiming the Credit
Businesses claim the Work Opportunity Tax Credit (WOTC) by verifying eligible hires and submitting required documentation to the IRS. The credit applies to current-year tax liability, with unused portions available for carryforward in certain cases. Employers must certify that new employees meet eligibility criteria through Form 8850 and submit it to the appropriate state workforce agency within the designated timeframe. Proper recordkeeping ensures compliance, as WOTC qualification depends on confirming employment status and program eligibility. Understanding the certification process and timely submission requirements is essential for claiming the credit successfully.
IRS and DOL Forms
Businesses must maintain IRS and Department of Labor forms to verify WOTC eligibility. IRS Form 8850 serves as a pre-screening notice, while DOL Forms 9061 and 9062 provide additional details on an employee’s background. These forms aren’t submitted to the IRS but must be retained, as state-specific certification processes vary. Some states may also require these forms as part of their own verification procedures. Proper documentation ensures businesses can substantiate claims if requested by the IRS or state agencies, demonstrating compliance with federal and state guidelines.
State Submissions
Navigating WOTC certification across all 50 states presents a unique challenge, as each state has its own processing methods, verification steps, and documentation requirements. While federal guidelines set the framework, states interpret and implement them differently, leading to variations in electronic filing systems, additional documentation requests, and processing delays. Some require extra verification, while others handle applications with minimal oversight, making it difficult for businesses to establish a uniform approach. Keeping up with these shifting state-specific procedures is essential, as missteps in compliance or documentation can impact a company’s ability to claim the credit.
Administrative Challenges
Managing the Work Opportunity Tax Credit (WOTC) requires businesses to handle significant data collection and tracking, which can present administrative challenges. The credit is fundamentally tied to employment records, requiring employers to capture key eligibility data without disrupting hiring workflows. Ensuring timely movement of information—from initial screening to certification—demands a structured approach, as delays or missing documentation can affect the ability to claim the credit. Additionally, businesses must maintain proper recordkeeping across multiple hires while navigating state-specific requirements, making accuracy and compliance essential. While the process is manageable with the right systems, understanding these administrative demands is critical to maximizing benefits efficiently.
Tax Exempt Organizations (WOC)
While the Work Opportunity Tax Credit (WOTC) helps businesses offset income tax liability for hiring individuals from various target groups, the Work Opportunity Credit (WOC) functions differently for tax-exempt organizations. Nonprofit employers can only claim WOC as a payroll tax offset, and it applies exclusively to wages paid to qualified veterans. Instead of reducing corporate income tax, the credit is used to lower the organization's share of Social Security taxes. Claiming WOC requires filing IRS Form 5884-C and meeting specific eligibility criteria, ensuring compliance with federal guidelines. Understanding this distinction is key for tax-exempt employers looking to utilize the credit while supporting veteran hiring initiatives.
State Credits and Other Credits
While screening for WOTC eligibility, businesses can incorporate additional steps to identify other tax incentives that may apply. Many states offer their own workforce tax credits, such as the New York Youth Jobs Program, which provides incentives for hiring young workers. Similarly, federal programs like Empowerment Zone credits offer tax benefits for businesses hiring employees in designated economically distressed areas. By integrating these additional screenings into the hiring process, organizations can maximize available incentives, ensuring they capture all potential tax benefits while maintaining compliance with state and federal regulations
History of WOTC (Revision coming soon)
Overview
The Work Opportunity Tax Credit (WOTC) is a federal tax incentive designed to encourage businesses to hire individuals facing barriers to employment. Since its introduction in 1996, WOTC has undergone multiple legislative changes, expanding target groups, refining eligibility criteria, and adjusting administrative processes. The credit provides financial benefits to employers while supporting workforce development initiatives.
1996 – WOTC Established
WOTC was introduced under the Small Business Job Protection Act of 1996 to incentivize hiring individuals from disadvantaged backgrounds. The original target groups included qualified ex-felons and recipients of Aid to Families with Dependent Children (AFDC), which was later replaced by Temporary Assistance for Needy Families (TANF). The program aimed to reduce unemployment and reliance on public assistance by offering tax credits to employers who hired individuals from these designated groups.
1997–2002 – Expansion of Target Groups and Program Adjustments
The Taxpayer Relief Act of 1997 introduced the Welfare-to-Work Tax Credit, creating a separate program focused on long-term family assistance recipients, adding complexity to tax credit administration. In 1998, Supplemental Security Income (SSI) recipients were added as a new target group, broadening employer incentives for hiring individuals facing financial hardship. Further extensions in 2001 refined eligibility, particularly for veterans and public assistance recipients, ensuring the credit remained aligned with workforce priorities.
2002–2006 – Administrative Simplifications and Program Consolidation
The Job Creation and Worker Assistance Act of 2002 extended WOTC while refining certification procedures to improve processing efficiency. In 2004, the Working Families Tax Relief Act reauthorized WOTC and the Welfare-to-Work Tax Credit, maintaining existing eligibility criteria but clarifying certification requirements for employees who worked in one state but received public assistance in another. Finally, in 2006, the Tax Relief and Health Care Act merged the Welfare-to-Work Tax Credit into WOTC, eliminating separate calculations and consolidating hiring incentives under a single program to reduce administrative burdens.
2009 – American Recovery and Reinvestment Act
The American Recovery and Reinvestment Act of 2009 expanded WOTC by introducing two new target groups: unemployed veterans and disconnected youth. This change was a direct response to the financial crisis, aiming to reduce unemployment among vulnerable populations. Employers could now claim tax credits for hiring individuals who had been unemployed for extended periods, encouraging workforce reintegration.
2011 – VOW to Hire Heroes Act
The VOW to Hire Heroes Act of 2011 further enhanced WOTC benefits for veterans. It introduced higher credit amounts for long-term unemployed veterans, increasing incentives for businesses that hired veterans who had been out of work for six months or more. This legislation reinforced the government’s commitment to veteran employment and workforce reintegration.
2015 – Protecting Americans from Tax Hikes (PATH) Act
The PATH Act of 2015 made WOTC a permanent part of the tax code, providing long-term stability for businesses relying on the credit. It also introduced electronic filing options, streamlining administrative processes and reducing delays in certification. This change improved efficiency for employers while ensuring compliance with federal regulations.
2021 – Consolidated Appropriations Act
The Consolidated Appropriations Act of 2021 extended WOTC through December 31, 2025, ensuring continued availability of the tax credit for employers hiring individuals from designated target groups. While this legislation did not introduce new eligibility criteria, it provided stability for businesses relying on WOTC as part of their hiring incentives.
2023 – Updated Procedural Guidance for Workforce Agencies
In November 2023, the U.S. Department of Labor issued updated procedural guidance for state workforce agencies handling WOTC certifications. This guidance aimed to improve processing efficiency, particularly for backlogged applications, by refining certification procedures and ensuring compliance with federal requirements. The update emphasized electronic submission and standardized verification processes, reducing delays for employers seeking tax credits.
Conclusion
WOTC is currently set to expire on December 31, 2025. However, based on historical patterns, it is likely to be extended once again, as lawmakers have consistently reauthorized the program to maintain its role in workforce development. Businesses utilizing WOTC should continue monitoring legislative updates to ensure they remain compliant and prepared for any future modifications.
Contact Us
Contact Abhay
Abhay Patel is a co-founder of FCA. He leads our WOTC tax credit practice with expertise in enterprise software solutions and business integrations. His past experience at WOTC.com and J.P. Morgan Chase has led to an efficient and streamlined approach to tax credits and incentives.
Dallas, Texas, USA
