Understanding Tax Credits (WOTC)
A one-year credit program called Work Opportunity Tax Credit (WOTC) is available to employers who hire new employees from certain “target groups.” The credit is used to reduce the federal tax liability of private for-profit employers.The maximum credit available is based on the total of qualified wages paid and the number of hours retained during the first year of employment. The exact amount of net tax savings depends upon each employer’s tax bracket, plus qualified wages paid. This credit can NOT exceed $2,400.
The tax credit does not apply to certain relatives of employers, nor to rehired workers who were not certified during their previous employment.
Requirements for WOTC. If an employer is requesting WOTC certification for a new employee, a Pre-Screening Notice (IRS Form #8850) must be postmarked on or before the 21st day after the employee starts work.
The new employee must work a minimum of 120 hours before the tax credit can be claimed.
While no WOTC tax credit may be claimed for an employee on an on-the-job training contract, credit may be claimed for wages paid after the contract expires. However, the employee must have been certified for WOTC prior to the first starting date with the employer. Also, the time spent by the employee on OJT qualifies the employer toward fulfilling the minimum retention period.
- Who may qualify?
- Qualified IV-a recipient (inlcudes AFDC)
- Qualified veteran
- Qualified ex-felon
- High-risk youth
- Vocational rehabilitation referral
- Qualified summer youth
- Qualified food-stamp recipient
- Qualified Supplemental Security Income (SSI) recipient
Applicants who fall into one of the following groups may qualify for the WOTC:
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Other details?
- Wages paid to temporary, seasonal, part-time, and full-time employees qualify for the credit.
- There is no limit to the number of employees for whom an employer may claim tax credit.
- The employer makes all hiring decisions.
- Claiming the tax credit requires minimal paperwork.
