Maximize Your Tax Savings and Make a Positive Impact: Work Opportunity Tax Credit
Written by Sarah Shirley
Ever since the world seemingly stopped during the COVID-19 pandemic, people everywhere have started placing greater importance on making a positive impact in the world and on those around them. As the focus shifted to collective well-being and resilience, a growing desire has emerged among businesses and individuals alike to embrace opportunities that not only maximize their own growth but also contribute to the betterment of their communities. For businesses looking to align purpose with prosperity, the Work Opportunity Tax Credit offers a chance to maximize tax savings while making a lasting impact on the community.
What is the Work Opportunity Tax Credit (WOTC)?
The WOTC is a general business credit for employers who hire and employ individuals from certain targeted groups who often face barriers when searching for employment. The credit was first created in 1996 and has since been extended to apply to employees hired on or before December 31, 2025. Generally, the credit is equal to 40% of up to $6,000 in wages paid, with a maximum tax credit of $2,400 per employee. Wages included are paid to individuals who are:
- In their first year of employment,
- Certified members of a targeted group, and
- Perform at least 400 hours of service for their employer.
For employees performing less than 400 hours but at least 120 hours of service, the credit is equal to 25% of the first $6,000 in wages paid. And for employees who are qualified veterans, employers can include up to $24,000 in wages when determining their credit.
What targeted groups are included when hiring eligible employees?
- Individuals formerly incarcerated or previously convicted of a felony
- Residents in Empowerment Zones or Rural Renewal counties
- Individuals completing a rehabilitation plan or program
- Individuals experiencing long-term unemployment
- Individuals whose families are recipients of Supplemental Nutrition Assistance Program (SNAP) benefits
- Individuals who are recipients or whose families are recipients of certain state assistance
- Individuals who are recipients of Social Security Income benefits
- Certain summer youth employees between the ages of 16 and 18
Which employers are eligible?
Employers of all sizes, both taxable and tax-exempt, are encouraged to utilize the credit. However, for tax-exempt employers, the credit is limited to wages paid to qualifying veterans.
How do I claim the credit?
If your business is eligible to claim the WOTC, there are only a few steps involved. The employer and employee must complete a Pre-Screening Notice and Request form and file a Form 5884 (or Form 5884-C for tax-exempt organizations) with their tax return each year the credit is claimed. Employers can also claim this credit along with other wage-based credits like the Employee Retention Credit.
Can BMSS help me claim the WOTC?
Yes! Contact your BMSS professional today at (833) CPA-BMSS or visit our website for more information.