The Work Opportunity Tax Credit (CRS Report for Congress)
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| Release Date |
Revised Sept. 25, 2018 |
| Report Number |
R43729 |
| Report Type |
Report |
| Authors |
Benjamin Collins, Analyst in Labor Policy; Sarah A. Donovan, Analyst in Labor Policy |
| Source Agency |
Congressional Research Service |
| Older Revisions |
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Summary:
The Work Opportunity Tax Credit (WOTC) is a provision of the Internal Revenue Code that allows employers that hire individuals with certain personal characteristics to claim a tax credit equal to a portion of the wages paid to those individuals. WOTC-eligible populations include recipients of certain public benefits (such as the Supplemental Nutrition Assistance Program or Temporary Assistance to Needy Families), qualified veterans, ex-felons, and other specified populations. In 2015, the WOTC was extended through 2019 as part of the Protecting Americans from Tax Hikes Act of 2015 (Division Q of P.L. 114-113).
The amount of the WOTC is calculated as a percentage of qualified wages paid to an eligible worker during the worker's first year of employment, up to a statutory maximum. An employer may claim a credit equal to 40% of an eligible employee's qualified wages if the qualified employee worked at least 400 hours during the first year of employment, up to a statutory maximum. If the employee worked fewer than 400 hours but more than 120 hours, the employer may claim a credit equal to 25% of the employee's qualified wages. If the employee worked fewer than 120 hours, an employer may not claim the WOTC. The WOTC is a nonrefundable tax credit, so an employer must have had tax liability to claim it.
Statute defines the maximum amount of qualified wages that were WOTC-eligible, so the maximum credit is equal to 40% of these statutory limits. The limit of wages that are WOTC-eligible varies by the characteristics of the worker. The most common wage ceiling is $6,000 (for a maximum credit of $2,400), though some subpopulations are eligible for a higher or lower maximum.
To claim the WOTC, an employer must have the employee certified as eligible by the appropriate state workforce agency. To do this, the employer submits a form to the state agency within 28 days of hiring the WOTC-eligible worker. The state agency determines that the individual meets the requirements and certifies the application. The employer may claim the credit as part of the General Business Credit. These credits can be carried back one tax year or carried forward up to 20 tax years.
Definitive data on WOTC usage are not available. Data on the number of individuals certified by state workforce agencies are available, but these data likely include some individuals who were certified for the WOTC but did not work the minimum number of hours necessary for the employer to be eligible for the credit. The Internal Revenue Service publishes data on the dollar amount of credits claimed by corporations, but these data omit when the credit is claimed by sole proprietors or other pass-through entities. Furthermore, since the WOTC may be claimed in a prior or subsequent tax year, the IRS data may not reflect hiring activity during that tax year.
