The Work Opportunity Tax Credit

Updated September 25, 2018 (R43729)
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Appendixes

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 claims by employers 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 as eligible for the WOTC but did not subsequently work the minimum number of hours necessary for the employer to be eligible for the credit. In FY2017, the most recent year for which data are available, approximately 2 million workers were certified as eligible for the WOTC.


The Work Opportunity Tax Credit (WOTC) is a provision of the Internal Revenue Code (Title 26 of the U.S. Code) that provides a tax credit to employers that hire workers with certain personal characteristics, including veterans, recipients of certain public benefits, or other specified populations.

Rationale and Current Status

The WOTC is designed to incentivize the hiring of employees with certain characteristics by subsidizing a portion of the qualified worker's wage.1 If an employer has a choice between hiring two identical applicants, one of whom is eligible for the WOTC and one of whom is not, the employer may opt to hire the WOTC-eligible applicant because employing that worker will have a lower after-tax cost.

The credit is structured to provide an advantage to workers from WOTC target groups seeking employment; it is not designed to stimulate the creation of new jobs. An eligible hire may be an additional employee of a firm or he or she may replace a separated employee.

The WOTC section of the Internal Revenue Code specifies an expiration date in the definition of WOTC-eligible wages. The credit was most recently extended by the Protecting Americans from Tax Hikes Act of 2015 (Division Q of P.L. 114-113).2 Under current law, wages earned by eligible workers who begin work before December 31, 2019, are eligible for the WOTC.3

Calculation of Credit and Maximum Credits

The amount of the WOTC is calculated as percentage of qualified wages paid to an eligible worker during the eligible employee's first year of employment.4 An employer may claim a credit equal to 40% of the eligible employee's qualified wages if the eligible worker works at least 400 hours during the first year of employment.5 If the eligible employee works fewer than 400 hours but at least 120 hours, the employer may claim a credit equal to 25% of the eligible employee's wages. If the eligible employee works fewer than 120 hours, an employer may not claim the WOTC.

Statute defines the maximum amount of qualified wages that are WOTC-eligible for each eligible population, so the maximum credit would be equal to 40% of these statutory limits. For example, the maximum eligible wages for a qualified ex-felon is $6,000, so the maximum credit for an employer that hired such an individual would be 40% of $6,000 or $2,400.

Eligible Worker Populations

This section describes the populations eligible for the WOTC under its most recent<del> </del>authorization.6

For most target groups, the maximum wages that are eligible for WOTC credit are $6,000. Assuming the eligible employee works at least 400 hours and the employer claims the full 40% credit, the maximum credit for most eligible workers is $2,400. Some eligible populations have different levels of qualified wages. Populations with maximum wages that are higher or lower than $6,000 are noted in their descriptions.

Table 1. Populations Eligible for the Work Opportunity Tax Credit

Population

Maximum WOTC-Eligible Wages (maximum credit is 40% of eligible wages)

TANF Recipients

$6,000

Veterans

$6,000 to $24,000

Ex-felons

$6,000

Designated Community Residents

$6,000

Vocational Rehabilitation Referrals

$6,000

Summer Youth Employees

$3,000

SNAP Recipients

$6,000

SSI Recipients

$6,000

Long-Term TANF Recipients

$10,000 per year for up to two yearsa

Long-Term Unemployment Recipients

$6,000

Source: CRS analysis of Sections 51 and 52 of the Internal Revenue Code.

a. In the second year of employment, the WOTC equals 50% of eligible second-year wages for long-term TANF recipients.

Eligible Employers

WOTC is a nonrefundable credit. As such, an employer must have tax liability to claim the credit. Since the WOTC can be claimed in a tax year subsequent to the year of hire, it is possible that an employer that hires a WOTC-eligible worker, but does not have tax liability in the year in which the eligible worker was hired, would be able to have the WOTC applied to a subsequent tax year in which the employer has tax liability.

Tax-exempt organizations that employ WOTC-eligible veterans may be eligible to claim a credit against the organization's payroll tax liability. This provision is limited to organizations that employ qualified veterans and does not apply to tax-exempt organizations that employ other WOTC-eligible populations.

Mechanics of the WOTC

Individuals' eligibility for the WOTC is determined by state workforce agencies (SWAs). These state agencies also process WOTC certifications.8

The eligibility determination process can follow one of two paths:

States then verify that an individual is a member of a covered group and notify the employer that the application has been certified. States receive grants from DOL to support the administrative costs of processing WOTC certifications.

Once a new hire is certified, the employer may claim WOTC as part of the General Business Credit.9 If an employer does not have tax liability in the tax year that the WOTC-eligible worker was hired, the credit from the WOTC—as part of the General Business Credit—can be carried back up to one year or carried forward up 20 years before expiring.

As noted in each of the two scenarios above, the IRS Form 8850 must be submitted within 28 days after the eligible hire begins work.10

Usage and Costs

Definitive data on the usage and costs of the WOTC are not available. However, data from DOL on workers certified for the WOTC and data from the IRS on WOTC claims by certain entities can offer some insight into usage of the credit.

DOL tracks the number of individuals who are certified as eligible for the WOTC, but, since not every certified worker meets the employment retention requirements, it is likely that the number of individuals on behalf of whom the WOTC is claimed is lower.

The primary costs of WOTC to the government are foregone tax revenue.11 Estimates of the value of credits claimed are published each year. However, due to employers' ability to apply the WOTC to prior or subsequent tax years, these estimates may not fully reflect the level of WOTC-based hiring during the reference year.

Data on Individuals Certified for the WOTC

The U.S. Employment Service in the Employment and Training Administration collects figures on the number of certifications issued to employers. The number of certifications is likely more than the number of employees for whom employers claim credits because not all eligible hires fulfill the retention requirement. The government does not collect statistics on the number of individuals for whom the credits actually are claimed. It would be difficult to reconcile the number of certifications and the number of credits claimed in a given tax year because companies that receive a certification for an eligible individual hired late in one tax year may not claim a credit for them until a following tax year, when the retention requirement has been met. In addition, credits claimed for persons certified in one year may be applied against income tax liabilities in past or future tax years.

Table 2 presents data on WOTC certifications from FY2015-FY2017. In FY2017, there were slightly more than 2.0 million WOTC certifications. SNAP recipients were the largest group by a substantial margin, accounting for more than 68% of the certifications. Veterans accounted for about 7% of workers certified.

Table 2. WOTC Certifications by Target Population, FY2015-FY2017

 

FY2015

FY2016

FY2017

 

Number

%

Number

%

Number

%

TANF Recipients

76,639

4.0%

87,158

3.5%

73,065

3.6%

Veteransa

121,629

6.4%

158,083

6.4%

149,495

7.4%

Ex-felons

53,307

2.8%

70,590

2.8%

67,862

3.4%

Designated Community Residents

75,568

4.0%

89,155

3.6%

78,300

3.9%

Vocational Rehabilitation Referralsb

27,932

1.5%

34,905

1.4%

30,831

1.5%

SNAP Recipients

1,381,946

72.9%

1,825,056

73.5%

1,376,325

68.2%

SSI Recipients

23,480

1.2%

41,797

1.7%

32,384

1.6%

Long-Term TANF Recipients

131,839

7.0%

169,283

6.8%

133,148

6.6%

Otherc

4,188

0.2%

8,122

0.3%

76,479

3.8%

Total

1,896,528

100.0%

2,484,149

100.0%

2,017,889

100.0%

Source: Data are from DOL, Employment and Training Administration, Past Program Outcomes and Data Reports, https://www.doleta.gov/business/incentives/opptax/wotcResources.cfm.

a. Includes all veterans certified under any of the "qualified veteran" criteria.

b. Includes Ticket-to-Work recipients .

c. This category includes long-term unemployment recipients in FY2016 and FY2017.

Data on Employers Claiming the WOTC

Most of the costs to the government from tax credits are in the form of revenue forgone rather than appropriated funds. Precise data on WOTC claims are not available from the IRS, but the Office of Management and Budget estimated that WOTC claims in FY2017 were about $1.3 billion, with corporations claiming about $1.0 billion and individuals (including employers that claim business income and expenses on their individual tax returns) claiming about $320 million.12 More granular data on the characteristics of employers that claimed the credit or the qualifying characteristics of workers on whose behalf credits were claimed are not available.

Appendix. Legislative History

WOTC is a temporary provision of the Internal Revenue Code. The WOTC's duration is limited by language in the law that specifies that wages paid to an eligible worker hired after a certain date are ineligible for the WOTC. Under current law, wages earned by workers hired after December 31, 2019, are not eligible for the WOTC. In general, there is no beginning date in the law regarding eligible hires.13 This construction means that simply extending the ending date in the law extends the program with retroactivity.

The credit has lapsed a number of times before being retroactively reauthorized. In addition to extending the duration of the credit, reauthorization legislation has changed the eligible populations and maximum credit levels. In other instances, legislation has changed WOTC-eligible populations and credit levels without extending the duration of authorization.

In addition to the WOTC, this legislative history also discusses the Welfare to Work (WtW) Tax Credit, which existed from 1997 to 2006. In 2007, the Welfare to Work Tax Credit was repealed and the credit's eligible population was incorporated into the WOTC population.

104th Congress

The WOTC was created by Section 1201 of the Small Business Job Protection Act of 1996 (P.L. 104-188). It allowed for-profit employers to claim a tax credit against their federal income tax liabilities for hiring members of seven specifically designated groups from October 1, 1996, through September 30, 1997.

105th Congress

The Taxpayer Relief Act of 1997 (P.L. 105-34) substantially revised the program by shortening the minimum employment requirement to 120 hours and creating a two-tier subsidy based on the length of retention. It also extended the credit for nine months from October 1, 1997, through June 30, 1998.

P.L. 105-34 also created the Welfare to Work (WtW) tax credit, which offered incentives to employers that hired long-term recipients of Title IV-A benefits. As noted previously, this credit would eventually be incorporated into the "long-term family assistance recipients" credit under WOTC.

WOTC lapsed for almost four months before being reauthorized for one year (through June 30, 1999) retroactive to its expiration date in the Omnibus Consolidated and Emergency Appropriations Act, 1999 (P.L. 105-277).

106th Congress

The 106th Congress reauthorized WOTC retroactive to its expiration date and extended the credit through December 31, 2001, in the Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170). This law also extended the WtW credit for the same period.

The 106th Congress later expanded the definition of the "high risk" and "summer youth" groups to include renewal communities (effective January 1, 2002) through passage of the Consolidated Appropriations Act, 2001 (P.L. 106-554).

107th Congress

After about a two-month lapse, the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147) reauthorized the WOTC. It extended the credit through December 31, 2003.

New York Liberty Zone Employees

The economic stimulus measure also amended the WOTC's eligible population to add "New York Liberty Zone business employees." Qualified businesses were defined as firms with 200 or fewer employees located in the vicinity of the World Trade Center as well as those that, due to property destruction or damage associated with the September 11 terrorist attack, had to relocate to other sections of New York City. While the other WOTC group members must be new hires in order for firms to claim a credit, New York Liberty Zone business employees were both existing and newly hired employees. The number of workers for whom firms that relocated elsewhere in New York City could claim the credit was limited to those on the employers' payrolls as of September 11, 2001; the cap did not apply to firms that remained in the zone or that moved into the zone. A qualified business could claim the WOTC for an eligible employee in 2002, 2003, or both years. The portion of the WOTC associated with the new target group was allowed against the alternative minimum tax.

108th Congress

The first WOTC-related law enacted by the 108th Congress was P.L. 108-203, the Social Security Protection Act of 2004. Among other provisions, the act modified the definition of the WOTC's vocational rehabilitation referral-eligible group in light of the Ticket to Work and Work Incentives Improvement Act of 1999. It effectively expanded the group to include disabled individuals with individualized work plans who are referred to employers not only by a state vocational rehabilitation agency (as was the case under prior law), but also by "employment networks" that were created by the Ticket to Work legislation. P.L. 108-203 did not extend the authorization for WOTC.

Later in the 108th Congress, President George W. Bush signed P.L. 108-311, the Working Families Tax Relief Act of 2004, which extended unrevised versions of the WOTC and WtW credit through December 31, 2005.

109th Congress

The 109th Congress made two substantial changes to the tax provisions. Some changes were temporary, others were permanent.

Hurricane Disaster Relief

Congress temporarily expanded the WOTC eligible-groups to include "a Hurricane Katrina employee" as part of its emergency response. P.L. 109-73 added to the WOTC-eligible groups persons whose principal place of abode on August 28, 2005, was in the core disaster area and who,

The WOTC's rule denying its application to wages of employees who had worked for the same employer at any prior time (except for those on the employer's payroll on August 28, 2005) is waived, as is the usual certification process.

Modifying the WOTC and Incorporating the WtW Credit into the WOTC

The WOTC and WtW credit expired after December 31, 2005. The credits remained lapsed for nearly a full year. In December 2006, P.L. 109-432 (the Tax Relief and Health Care Act of 2006) reauthorized the WOTC for two years, extending its expiration date to December 31, 2007. P.L. 109-432 also scheduled the consolidation of the WtW into the WOTC.

Changes to the WOTC credit became effective for persons hired after December 31, 2006. They are as follows:

110th Congress

Expansion of Certain Eligible Groups and Extension to August 2011

In May 2007, the President signed H.R. 2206 (the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Act of 2007, P.L. 110-28) into law. P.L. 110-28 extended the WOTC for three-and-one-half years through August 31, 2011, raises the age limit for "designated community residents" to less than 40 years old, and clarifies the definition of vocational rehabilitation referrals. The act also adds "rural renewal county" to the places of residence for designated community residents. The law also adopts a revised definition of disabled veterans.

"Hurricane Katrina Employees"

In the Tax Extenders and Alternative Minimum Tax Relief Act of 2008 (P.L. 110-343), Congress extended the WOTC's expiration from August 28, 2007, to August 28, 2009, for firms who hire "Hurricane Katrina employees" to work in the disaster area.

111th Congress

Temporary Expansion for Unemployed Veterans and Disconnected Youth

The American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5) temporarily expanded the credit to cover unemployed veterans and disconnected youth who begin working for an employer during 2009 or 2010. Unemployed veterans are persons discharged or released from active duty in the Armed Forces within five years of their hiring date and having received unemployment compensation for not less than four weeks during the one-year period ending on the hiring date. Disconnected youth are 16- to 24-year-olds who are not regularly attending school during the six-month period preceding the hiring date, not regularly employed within the same time frame, and "not readily employable by reason of lacking a sufficient number of basic skills."

The eligibility of disconnected youth expired after December 31, 2010. Veterans' eligibility for the WOTC would be modified and extended through the VOW to Hire Heroes Act (discussed in the next section).

Interaction with Payroll Tax Forgiveness

The Hiring Incentives to Restore Employment Act (HIRE Act; P.L. 111-147) provided payroll tax forgiveness to employers who hired certain unemployed individuals in 2010. Employers claiming the payroll tax forgiveness could not claim the WOTC for those wages associated with payroll tax forgiveness. Individuals hired after December 31, 2010, were not eligible for payroll tax forgiveness under the HIRE Act.

Extension to December 31, 2011

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the WOTC through December 31, 2011.

112th Congress

Expansion and Extension of Qualified Veterans Group

P.L. 112-56, the VOW to Hire Heroes Act, expanded the qualified veterans group covered by WOTC and changed the amount of first-year wages that can be claimed for the credit, such that

P.L. 112-56 made the WOTC refundable for certain tax-exempt employers. For these employers, the refundable credit would be the lesser of the calculated WOTC for hiring veterans who qualify for the WOTC based on unemployment or the payroll taxes paid by the tax-exempt employer.

P.L. 112-56 extended the WOTC for qualified veterans to U.S. possessions with a tax system that mirrors the U.S. tax system, with the Secretary of the Treasury paying to the possession the amount lost to the possession in taxes because of the expansion of the WOTC for qualified veterans.14

P.L. 112-56 also extended the expiration date of WOTC for veterans to December 31, 2012. This law did not extend authorization of the credit for non-veterans.

Extension to December 31, 2013

The WOTC for non-veterans lapsed after December 31, 2011, and the WOTC for veterans lapsed after December 31, 2012. Enacted on January 2, 2013, the American Taxpayer Relief Act of 2012 (P.L. 112-240) extended the WOTC for all eligible populations through December 31, 2013.

113th Congress

The Tax Increase Prevention Act of 2014 (P.L. 113-295) retroactively extended the WOTC to cover all eligible employees who began work prior to December 31, 2014.

114th Congress

The Protecting Americans from Tax Hikes Act of 2015 (Division Q of P.L. 114-113) expanded the WOTC to include long-term unemployment recipients (i.e., individuals who have been unemployed for at least 27 consecutive weeks and received unemployment compensation under state or federal law at some point during that period) who begin work on or after December 31, 2015. The act extended the WOTC for all eligible populations through December 31, 2019.

Table A-1. Legislation Extending the Work Opportunity Tax Credit

Public Law Number

Date of Enactment

Amended Expiration Date of WOTC

P.L. 104-188

08/20/1996

September 30, 1997

P.L. 105-34

09/03/1997

June 30, 1998

P.L. 105-277

10/21/1998

June 30, 1999

P.L. 106-170

12/17/1999

December 31, 2001

P.L. 107-147

03/09/2002

December 31, 2003

P.L. 108-311

10/04/2004

December 31, 2005

P.L. 109-432

12/20/2006

December 31, 2007

P.L. 110-28

05/25/2007

August 31, 2011

P.L. 111-312

12/17/2010

December 31, 2011

P.L. 112-56

11/21/2011

December 31, 2012a

P.L. 112-240

01/02/2013

December 31, 2013

P.L. 113-295

12/19/2014

December 31, 2014

P.L. 114-113

12/18/2015

December 31, 2019

Source: CRS analysis of listed legislation.

Notes: Table does not include legislation that amended WOTC provisions but did not change the expiration date.

a. Extension applied to qualified veterans only.

Author Contact Information

Benjamin Collins, Analyst in Labor Policy ([email address scrubbed], [phone number scrubbed])
Sarah A. Donovan, Analyst in Labor Policy ([email address scrubbed], [phone number scrubbed])

Footnotes

1.

The credit is calculated as a percentage of the eligible employee's wages, up to a statutory maximum; see the "Calculation of Credit and Maximum Credits" section of this report. The maximum eligible wages (and corresponding credit) per worker depend on the worker's specific characteristics. See the "Eligible Worker Populations" section of this report.

2.

Other divisions of P.L. 114-113 contained FY2016 appropriations for a number of federal agencies. This broader law is called the Consolidated Appropriations Act, 2016.

3.

See 26 U.S.C. 51(c)(4).

4.

The maximum amount of WOTC-eligible wages varies by workers' characteristics; see the "Eligible Worker Populations" section later in this report. In limited cases, an employer may claim the credit over two years.

5.

See 26 U.S.C. 51(i)(3).

6.

Since the WOTC was enacted in the 104th Congress, the eligible populations have varied. A discussion of the evolution of the WOTC and covered populations is in the Legislative History in the Appendix of this report.

7.

The SNAP provisions regarding able-bodied adults without dependents only apply to persons between the ages of 18 and 49. As such, persons between the ages of 40 and 49 would meet the ABAWD criteria, but not be eligible for the WOTC.

8.

Employer-directed guidance from the U.S. Department of Labor, including links to relevant state agencies, is available at https://www.doleta.gov/business/incentives/opptax/wotcEmployers.cfm.

9.

Employers have three years starting from the due date for filing a tax return to claim the WOTC. For more information on the General Business Credit, including other credits that fall under its purview, see IRS Instructions for Form 3800 at http://www.irs.gov/pub/irs-pdf/i3800.pdf.

10.

This requirement continues during periods of lapsed authorization, though the IRS may waive the deadline. For example, the WOTC lapsed after December 31, 2014, and was retroactively reauthorized in December 2015. After the reauthorization, the IRS issued notice that employers that submit Form 8850 on behalf of employees who began work between January 1, 2015, and May 31, 2016, would be in compliance with the deadline provisions if the request was submitted by June 29, 2016. See IRS Notice 2016-22 at https://www.irs.gov/pub/irs-drop/n-16-22.pdf.

11.

Congress appropriates funds to support state workforce agencies' administration of the WOTC. Most recently, Division H of the Consolidated Appropriations Act, 2016 (P.L. 114-113) appropriated $19.8 million for this purpose.

12.

Office of Management and Budget, Fiscal Year 2019 Analytical Perspectives: Budget of the U.S. Government, Chapter 14: Tax Expenditures, Tables 13-2A and 13-2B, https://www.whitehouse.gov/wp-content/uploads/2018/02/ap_13_expenditures-fy2019.pdf.

13.

An exception can occur when a reauthorization creates a new target group category. For example, the most recent authorization as part of P.L. 114-113 extended the credit to workers who hire an employee who meets the criteria for the long-term unemployed target group. The tax credit can only be claimed for eligible employees in this group who were hired after December 31, 2015.

14.

Possessions include American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin Islands.