Form 5884: Work Opportunity Credit

The Work Opportunity Credit (WOTC) is a federal tax credit offered by the Internal Revenue Service (IRS) to businesses that hire employees from specific groups facing employment challenges. This program incentivizes businesses to create job opportunities for these individuals, promoting workplace diversity and inclusion.

What is the Work Opportunity Credit?

The Work Opportunity Credit (WOTC) is a federal tax credit offered by the Internal Revenue Service (IRS) to incentivize businesses to hire employees from specific groups that have historically faced employment barriers. By claiming the WOTC, businesses can reduce their federal tax liability.

Who can claim the Work Opportunity Credit?

Any for-profit business or tax-exempt organization that hires qualified employees can claim the WOTC. This includes businesses of all sizes and types, from sole proprietorships to corporations.

Who qualifies as a targeted group employee?

Employees qualify for the WOTC if they belong to one of the following targeted groups:

Veterans: Recently unemployed veterans (within six months of discharge) and veterans receiving compensation for a service-connected disability.

Recipients of Long-Term Family Assistance: Individuals who have received benefits under a qualified Temporary Assistance for Needy Families (TANF) program for at least 18 consecutive months.

Summer Youth Employees: Qualified individuals aged 16 or 17 who live in an empowerment zone or rural renewal community. (Note: This provision may not be applicable after 2013 unless the designation is extended).

Vocational Rehabilitation Referrals: Individuals referred to the employer by a vocational rehabilitation program.

Ex-Felons: Qualified individuals who have been convicted of a felony within the past year.

Food Stamp Recipients: Individuals who are certified to receive food stamps.

Supplemental Security Income (SSI) Recipients: Individuals who receive SSI benefits.

High School Equivalency Program Completers: Individuals who recently completed a high school equivalency program (e.g., GED).

How to claim the Work Opportunity Credit?

To claim the WOTC, businesses must follow these steps:

A. Pre-screening: Before offering a job to a potential employee, the business must complete Form 885, Pre-screening Notice and Certification Request, and submit it to the appropriate state agency. This form helps determine if the employee belongs to a targeted group.

B. Certification: Once the state agency verifies the employee's eligibility, they will issue a certification.

C. Form 5884: Attach the certification to Form 5884 when filing your business tax return. This form calculates the amount of credit based on qualified wages paid to the certified employees.

Is there a deadline to file Form 5884?

No, there's no specific deadline to claim the WOTC. However, you can claim it on your original tax return or an amended return within three years from the original due date of your return.

What are qualified wages for the WOTC?

Qualified wages refer to the wages paid to a certified employee during their first and second year of employment, up to a certain limit set by the IRS each year. Wages paid for hours not worked (e.g., vacation pay) do not qualify.

How much is the Work Opportunity Credit worth?

The credit amount depends on several factors, including:

  • The category of the targeted group employee.
  • The number of hours worked by the employee.
  • The year of employment (first or second).

The credit percentage for each category is outlined on Form 5884 and can change annually.