A tax credit that may not often come to mind for employers is the Work Opportunity Tax Credit (WOTC). This federal tax credit generally allows an employer to claim 40% of an employee’s wages (up to $6,000 of wages) as a credit upon hiring an employee who is part of one of ten targeted groups of individuals; these target groups are typically individuals who have faced barriers to employment. Some examples of these targeted groups are recipients of state assistance, veterans, individuals experiencing long-term unemployment, and others which we will further discuss later.
The process for obtaining a Work Opportunity Tax Credit begins prior to hiring a prospective applicant. An individual must be certified by a designated local agency (Colorado Workforce) as being a member of one of the ten targeted groups. The certification process involves the following requirements:
- An individual must begin work by December 31, 2025.
- Is in first year of employment for the hiring employer.
- Performs at least 400 hours of service.
- Prior to the day that an offer of employment is made, the employer and job applicant must complete Form 8850 (further discussion coming up).
If an employee does not perform 400 hours of service, an employer can still receive a WOTC if the employee has worked at least 120 hours; however, employers will only receive a credit of 25% of the employee’s wages. Furthermore, employers can receive a credit of up to $24,000 of an employee’s wages for qualifying veterans.
Once an employer and the potential job applicant have completed Form 8850, the employer must submit this form to the SWA (State Workforce Authority) of the state; this form should not be sent to the IRS. It’s possible that other forms may be required depending on what target group an individual is classified as. To obtain Form 8850 and for instructions regarding this process, please use the following IRS links:
Form 8850: https://www.irs.gov/pub/irs-pdf/f8850.pdf
Form 8850 Instructions: https://www.irs.gov/pub/irs-pdf/i8850.pdf
As mentioned previously, there are ten categories of targeted groups that qualify for the WOTC certification. Those ten groups are the following:
- Qualified IV-A Recipient – an individual who is a member of a family receiving assistance under a state approved plan.
- Qualified Veteran
- Qualified ex-Felon – formerly incarcerated; previously convicted of a felon.
- Designated Community resident – an individual 18-39 years old who lives within a rural renewal county (CO: Cheyenne, Kiowa, and San Juan County).
- Vocational rehabilitation referral – an individual with a physical or mental impairment resulting in a substantial handicap.
- Summer youth employee – an individual 16-17 years of age, performs service from May 1 to Sep. 15, and lives in empowerment zone (economically distressed community).
- Recipient of SNAP benefits – (food stamps)
- SSI Recipient – an individual receiving supplemental security income.
- Long-term family assistance recipient – an individual who is a member of a family receiving TANF payments for designated periods of time.
- Qualified long-term unemployment recipient – an individual unemployed for 27 consecutive weeks.
For more information regarding WOTC procedures and qualifications, please visit the following resources:
IRS Website – WOTC: https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit
Empowerment Zones & WOTC Info: https://www.cmswotc.com/empowerment-zones-enterprise-zones-rural-renewal-counties-map/