The Work Opportunity Tax Credit (WOTC) provides a tax credit to employers of up to 40% of “qualified first year wages” for individuals in groups with high unemployment rates or other special employment needs. If the individual is a disabled veteran, the credit can be double the standard amount and if they are a recipient of “Long-term Family Assistance,” the credit can be claimed over a two-year period and is based on a higher percentage of wages.

The IRS cited individuals in the following specified groups as being targeted for this credit:

• Qualified recipient of assistance under title IV of the Social Security Act
• Qualified veteran
• Qualified ex-felon
• Designated community resident
• Vocational rehabilitation referral
• Qualified summer youth employee
• Qualified recipient of supplemental nutrition assistance program benefits
• Qualified SSI recipient
• Long-term family assistance recipient
• Unemployed veteran
• Disconnected youth

Note: The American Recovery and Reinvestment Act (ARRA) of 2009 added Unemployed Veterans and Disconnected Youth to the list of targeted groups.

According to the IRS, to claim the credit the taxpayer’s “State Employment Security Agency” (SESA) must certify an employee is a member of a targeted group, except for employees who were Hurricane Katrina victims for whom certification is not required. Certification can be obtained in two ways:

1) On or before the employee’s starting date, certification from the SESA that the employee is a member of a targeted group must be received; or

2) On or before the employee’s starting date, the employee must complete Page 1 of the “Pre-Screening Notice and Certification Request for the Work Opportunity Credits” (Form 8850), then the employer (taxpayer) completes Page 2 of the form and submits it to the state workforce agency within 28 days from the employee’s starting date.

Note: Certification must be received before the WOTC can be claimed for the employee.

The WOTC is applicable to employees who began working after 2008 and before 2011, and should be claimed on the “Work Opportunity Credit” (Form 5884).

The credit is available once for each targeted-group member and is calculated on wages paid for the one-year period beginning on the employee’s starting date with a maximum of qualified first-year wages equal to $6,000 ($3,000 for summer youth employees). There are two rates used to calculate the credit depending on the number of hours worked by the employee:

1) 25% for employees working between 120 to 400 hours with a maximum credit of $1,500.

2) 40% for employees working over 400 hours with a maximum credit is $2,400.

More information is available on the IRS website, “IRS Offers Tax Credit Guidance to Businesses Hiring Unemployed Veterans and Certain Youth” (Notice 2009-55), dated May 28, 2009, “Section 51 – Work Opportunity Tax Credit” (Notice 2009-28), “Work Opportunity Credit,” dated November 26, 2009, “Other Credits,” dated December 29, 2009, and “Tax Incentives for Empowerment Zones and Other Distressed Communities” (Publication 954). Taxpayers should also consult with CPAs, professional tax preparers or other tax practitioners for advice on their specific tax situation.

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