The Work Opportunity Tax Credit (WOTC) is a federal tax incentive for employers who hire workers who are poor, disabled, or face other challenges. This includes Supplemental Security Income (SSI) recipients, CalWORKS and long-term Temporary Aid to Needy Families (TANF) recipients, and participants in Vocational Rehabilitation and Ticket to Work Employment Network programs.

Employers who hire people meeting these or other criteria may reduce the amount they owe on their federal taxes by as much as $2,400. If the employee is a long-term Temporary Aid to Needy Families (TANF) recipient, the tax credit may be as high as $9,000.

Who Qualifies?

There are nine Work Opportunity Tax Credit target groups. Employers hiring an individual who fits into one of these nine groups may be eligible for a tax credit.

1. CalWORKS (TANF) recipients.
2. Veterans who are receiving Food Stamps.
3. Ex-felons hired no later than one year after conviction or release from prison.
4. Designated community residents, aged 18-39, who live in a federally designated Empowerment Zone, Enterprise Community, or Renewal Community.
5. Vocational Rehabilitation and Ticket to Work Employment Network referrals.
6. Summer youth, aged 16-17, who live in a federally designated Empowerment Zone, Enterprise Community, or Renewal Community and have not previously worked for the employer.
7. Food Stamp recipients, aged 18-39.
8. Recipients of Supplemental Security Income (SSI).
9. Long-term Temporary Aid to Needy Families (TANF) recipients.

Details regarding the nine target groups, including specific requirements for inclusion in each, are provided below.

How Does The Program Work?

Businesses that take advantage of the Work Opportunity Tax Credit may save a significant amount of money on their federal income taxes.

If an employer hires someone in one of the first eight target groups above, and that person works at least 400 hours during their first 12 months on the job, the employer can claim a 40 percent tax credit on the first $6,000 they pay that person. That amounts to a maximum tax credit of $2,400.

If an employer hires someone in one of the first eight target groups, and that person works 120-399 hours, the employer can claim a 25 percent tax credit on the first $6,000 they pay them (for a maximum tax credit of $1,500).

Of the first eight target groups, the only one that is handled slightly differently is the sixth - summer youth. Businesses that hire a "summer youth" can claim a 25% tax credit on the first $3,000 they pay them (for a maximum tax credit of $750). If the youth works 400 or more hours, the credit increases to 40% (for a maximum credit of $1,200).

Example:

John's shoe store hires Alex. Alex was referred to the store by his local Vocational Rehabilitation Agency and meets the criteria for WOTC target group 5. Alex works a total of 600 hours during his first 12 months, earning $7,000. Because Alex worked more than 400 hours during his first year, the store can claim a 40% tax credit on the first $6,000 they pay him. That amounts to a $2,400 tax credit. Without the tax credit, the store would have owed $10,000 in federal taxes. With the credit, they owe $7,600 ($10,000 minus $2,400).

No Limit to Credits Available

There is no limit to the number of Work Opportunity Tax Credits an employer can claim. If an employer hires ten people in one of the first eight target groups, and all ten work more than 400 hours during their first year, the employer could save as much as $24,000 on their federal taxes (10 x $2,400).

Time Constraints for Target Groups 1-8

WOTC defines an employee's "first full year of employment" as their first 12 months on the job (from start date to first anniversary of start date). So, if an employee begins working in June 2007 and continues into 2008, the business could claim part of the tax credit on their 2007 taxes and the rest on their 2008 taxes (until the full $2,400 is claimed).

If an employer is unable to claim their tax credit in the current year, they can carry it back one year or carry it forward for 20 years.

Target Group 9

Unlike the other eight target groups, employers who hire long-term Temporary Aid to Needy Families (TANF) recipients (target group 9) can claim a 40 percent tax credit on the first $10,000 they pay that person during their first year of employment, and a 50 percent tax credit on the first $10,000 in the second year. This amounts to a maximum tax credit of $9,000 over two years ($4,000 in year one and $5,000 in year two).

The employee must work at least 400 hours per year for the employer to qualify for the maximum credit. If the employee works 120-399 hours, a 25% credit on the first $10,000 in wages is available.

If an employer hires an employee who meets the criteria for target group 9 and one of the other eight target groups, the employer must choose which credit they want to take. They cannot claim both. The credit for target group 9 used to be known as the Welfare-to-Work tax credit.

How Do Employers Apply for a WOTC?

To apply for a WOTC, employers must first determine if the job applicant meets the criteria of one of the nine target groups. To do this, they should ask potential employees to fill out an Individual Characteristics Form (DOLETA Form 9061). Job applicants do not have to provide the information requested on this form; their participation is strictly voluntary.
Assuming the applicant fills out the form, the employer should then review it. If the employer thinks the applicant fits into one of the nine target groups, they should complete a Pre-Screening Notice and Certification Form (IRS Form 8850) and mail both forms to the Employment Development Department (EDD) WOTC Center. Forms must be postmarked within 28 days of the employee's first day on the job and sent to:

WOTC Center
Employment Development Department
2901 50th St
Sacramento, CA 95817
Ph: (866) 593-0173

In some cases, a job applicant may have a Conditional Certification Form (DOLETA Form 9062) showing they have been pre-screened for WOTC eligibility by the Employment Development Department. In this situation, an Individual Characteristics Form (Form 9061) is no longer necessary. Instead the employer would complete the employer portion of Form 9062, and submit it to the WOTC Center along with Form 8850. Job seekers who have been pre-screened for WOTC eligibility can let employees know when applying for jobs.

The WOTC Center will review all information submitted by the employer. If the employer qualifies for a WOTC, the Center will send them a Work Opportunity Tax Credit Certification letter (DE 8727). The employer should hang onto this letter for their records; they do not need to submit it with their taxes. Instead, they'll submit an IRS Form 5884 when claiming the WOTC on their taxes.

For more details on how to submit a WOTC application, read the Employment Development Department's WOTC Employer Guide or call the WOTC Center at (866) 593-0173.

The Target Groups

The following is a more detailed description of each of the nine WOTC target groups, including specific requirements for inclusion in each. Many people with disabilities fit within one of the nine target groups.

CalWORKS (TANF) Recipients

• Is a member of a family that receives CalWORKs for any nine months within the 18 months prior to the hiring date. The nine months do not need to be consecutive.

Note: CalWORKS provides income support and health coverage access to low-income families in California on a temporary basis. You may hear CalWORKS referred to as "Aid to Families with Dependent Children" (AFDC) or "Temporary Aid to Needy Families" (TANF). TANF is actually the federal grant that funds the CalWORKS program in California.

Veterans Receiving Food Stamps

• Has served on active military duty for more than 180 consecutive days or was released from active duty due to a service-related disability, and
• Has not been on active duty for at least 60 days prior to the hiring date, and
• Has received Food Stamps for at least 3 months within the 15 months prior to the hiring date.

Ex-Felons

• Is an ex-felon hired within one year of conviction or release from prison.
  Designated Community Residents
• Is 18-39 years old on the hiring date, and
• Lives in a federally designated Empowerment Zone, Enterprise Community, or Renewal Community.

Vocational Rehabilitation and Employment Network Participants

• Was referred to the employer while receiving services at a state Vocational Rehabilitation Agency, or
• Was referred to the employer via a Ticket to Work Employment Network. The employee must have an active Individual Work Plan (IWP) in this situation.

Summer Youth Employees

• Is employed between May 1 and September 15, and
• Is 16 or 17 years old on the hiring date, and
• Has not worked with the employer before, and
• Lives in a federally designated Empowerment Zone, Enterprise Community, or Renewal Community.

Food Stamp Recipients

• Is 18-39 years old on the hiring date, and
• Is a member of a family receiving Food Stamps for at least the last six months prior to the hiring date, or
• Is a member of a family that received Food Stamps for at least three of the five months prior to being hired but is no longer eligible for them.

Supplemental Security Income Recipients

• Has received Supplemental Security Income (SSI) for any month within the 60 days prior to the hiring date.

Note: Supplemental Security Income (SSI) is a Social Security program that provides monthly income for people with disabilities who have limited income and resources.

Long Term Temporary Aid to Needy Families Recipients

• Is a member of a family that has received Temporary Aid to Needy Families (TANF) for at least the past 18 months prior to the hiring date, or
• Is a member of a family that has received TANF for 18 months (consecutive or nonconsecutive) after August 5, 1997 with the earliest 18-month period ending within two years of the hiring date, or
• Is a member of a family that stopped being eligible for TANF payments during the past 2 years because federal or state law limited the maximum time those payments could be made.

Note: TANF is a federal welfare program (formerly known as "Aid to Families with Dependent Children," or AFDC) that provides income support and Medicaid access for low-income adults with children. In California, you may hear TANF referred to as "CalWORKs." TANF is actually the federal grant that funds the state's CalWORKS program.

Federal Empowerment Zones, Enterprise Communities, and Renewal Communities

According to the EDD, Federal Empowerment Zones (EZ), Enterprise Communities (EC), and Renewal Communities (RC) are areas characterized by high levels of poverty, unemployment and general distress. California has several EZs, ECs, and RCs, including certain communities within the following areas:

• Desert Communities
• Fresno
• Imperial County
• Los Angeles
• Orange Cove
• Parlier
• San Diego
• San Francisco
• Santa Ana

To find out if an applicant's address is within an EZ, EC, or RC, contact the Housing and Urban Development Department at (800) 998-9999 or use their address locator.

WOTC-ineligible employees

Certain employees will not qualify a business for a WOTC, even if they fit into one of the nine target groups above. This includes:

• An employee who is a relative or dependent.
• An employee the employer rehired.
• An employee working less than 120 hours in a year.

Click here for a complete listing of employees who are ineligible for the WOTC.

Sources

The Employment Development Department (EDD) oversees the WOTC program in California. The EDD website provides detailed information on WOTC, including an excellent guide for employers.

The U.S. Department of Labor provides extensive information on the Work Opportunity Tax Credit, including forms in English and Spanish, and contact information for WOTC coordinators around the country.

Most WOTC forms are available online, including IRS Form 5884, DOLETA Form 9061, DOLETA Form 9062, and IRS Form 8850. WOTC forms can also be obtained by calling 877-828-2050. Follow the instructions and enter the document number that corresponds with the form you need.

The IRS provides detailed information on WOTC, including information on qualifying and non-qualifying wages.

If you have questions or require additional information regarding WOTC, contact the WOTC Center at (866) 593-0173. The WOTC Coordinator for California is Shirley Pertle. She can be reached at:

Ms. Shirley Pertle, Statewide WOTC Coordinator
Employment Development Department
Workforce Services Division
PO Box 826880 MIC 50
Sacramento, CA 94280
Phone: 916-654-5857
Fax: 916-657-0055
SPertle@edd.ca.gov