What is a Work Opportunity Tax Credit?

Felicia Dye

The Work Opportunity Tax Credit (WOTC) offers a reduction of tax liability to employers who hire workers from targeted groups. These include Hurricane Katrina victims, designated community residents, and summer youth employees. This tax credit is limited to private sector employers.

Employers who hire workers from targeted groups are typically eligible to claim the Work Opportunity Tax Credit.
Employers who hire workers from targeted groups are typically eligible to claim the Work Opportunity Tax Credit.

The United States (US) government recognizes that some people have more difficulty getting jobs than others. To provide an incentive for hiring some of these individuals, Congress created 12 target groups. These are individuals such as those who receive Temporary Aid to Needy Families (TANF), Social Security recipients, and ex-felons. Congress then authorized the extension of tax credits to private sector employers who hire qualified individuals from these groups.

Individuals may fall into one of the categories listed but may not qualify to earn an employer the Work Opportunity Tax Credit. For example, an employer will not receive the credit simply for hiring a veteran. A qualified veteran is one who was not discharged more than five years before his hire date, who was unemployed, and who received unemployment benefits for at least four weeks during the year before he was hired.

There is no limit to the number of employees an employer can hire from target groups nor is there a limit to the number of tax credits that can be received for doing so. It should be noted, however, that an employer may only claim the Work Opportunity Tax Credit once. There is also a procedure required if employers wish to have the WOTC apply.

After an employer hires a person from one of the target groups, she must request certification of this fact from her state's employment agency. An employer may generally only claim the Work Opportunity Tax Credit if she receives this certification before the individual begins working. Employers seeking this tax credit must also complete and submit IRS forms within 28 days from the time the qualified employee begins working.

The Work Opportunity Tax Credit is portrayed as having numerous benefits. To begin with, it can help reduce the number of people who rely on social service benefits by providing them with resources to care for themselves. It empowers more individuals to contribute to the welfare of society by adding a portion of their earnings to tax revenues. It also compensates employers for any additional efforts and resources they spend to employ these individuals while also encouraging them to have a different outlook on hiring practices.

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