Employers are always looking for ways to reduce their tax liability. One way to do this is through a lesser-known hiring program called the Work Opportunity Tax Credit. In this article, we’ll explain what the credit entails, how much it’s worth, and which businesses can claim it.
What is The Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (WOTC) is a business credit that is jointly administered by the IRS and the Department of Labor. This tax credit is available for wages paid to certain individuals from targeted groups who begin work on or before December 31, 2025. The credit is not available for employees who are rehired.
How Much is The Credit?
Generally, the WOTC is worth 40% of up to $6,000 of wages paid to, or incurred on behalf of, individuals who:
- Are in their first year of employment;
- Belong to a targeted group (certified member); and
- Perform a minimum of 400 hours of services for the employer claiming the credit.
For qualified employees who work less than 400 hours but at least 120, the credit amount drops to 25%. The maximum credit ranges between $2,400 and $9,600, depending on the qualified wages paid during the first year of employment and the employee’s target group. Employers who hire qualified veterans may consider up to $24,000 in wages paid to or incurred on behalf of these targeted employees.
Can Taxable and Tax-Exempt Employers Claim The Credit?
Employers of any size are eligible to claim the Work Opportunity Tax Credit. This includes both tax-exempt and taxable employers. Although taxable employers can claim the WOTC against income taxes, tax-exempt employers are restricted to claiming the credit against payroll taxes. Wages paid to qualified veterans, however, are eligible. Additionally, employers must be located in the United States or certain U.S. territories to claim the credit.
Which Employees Can an Employer Claim Under The WOTC?
Employers can claim the Work Opportunity Tax Credit for employees from the following targeted groups:
- Qualified Ex-Felons – previously incarcerated for or convicted of a felony.
- Qualified IV-A Recipients – individuals who are members of a family receiving assistance under a state program funded under part A of Title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9 months during the 18 months ending on the hiring date.
- Qualified Veterans – this includes veterans who have been unemployed for at least 4 weeks or longer (doesn’t have to be consecutive) in the one year ending on the hiring date, as well as those entitled to compensation for a service-related disability and hired within a year of being discharged from active duty. Those receiving SNAP assistance for at least three months during the 15 months ending on the hiring date are also eligible. Additionally, veterans who are entitled to disability compensation (service-connected) and unemployed for at least 6 months in the one-year period ending on the hiring date also qualify.
- Designated Community Residents – must be between the ages of 18 and 39, and have a principal address within an empowerment zone (EZ) or rural renewal county (RRC).
- Vocational Rehab Referrals – persons with a mental or physical disability who have been referred to the employer while receiving or completing rehabilitative services pursuant to a state or employment network plan, or a program administered by the Department of Veterans Affairs.
- Qualified Summer Youth – young adults ages 16 or 17 by May 1 or the hiring date, whichever is later, who perform services for the employer between May 1 and September 15. Must also live in an empowerment zone.
- Qualified SNAP Recipients – individuals between the ages of 18 and 39 who are members of a family that received Supplemental Nutrition Assistance Program (SNAP) benefits for the previous 6 months or at least three of the previous five months before being hired.
- Qualified SSI Recipients – individuals who received Supplement Security Income (SSI) for any month ending within 60 days before the hire date.
- Long-Term Family Assistance Recipients – persons who, at the time of hiring, are members of a family that meets one of the following conditions: received assistance under an IV-A program for a minimum of 18 consecutive months before their hire date, or an 18-month period beginning after 8/5/1997 and it has not been more than two years since the end of the earliest period, or they ceased to be eligible (no more than two years before their hire date) because a federal or state law limited the maximum time payments could be made.
- Qualified Long-Term Unemployment Recipient – individuals who have been unemployed for at least 27 consecutive weeks at the time of hiring and received unemployment compensation for some or all of the unemployment period.
An employer must obtain certification that an individual is a targeted group member before claiming the credit. Certification of an individual’s targeted group status is obtained from a designated local agency (DLA) by submitting Form 8850 no later than the 28th day after the individual begins working for the employer.
How to Claim The Work Opportunity Tax Credit
Once an employer has submitted the required certification (Form 8850), they must submit the necessary IRS forms for their type of business.
Taxable employers can claim the credit as a general business credit by filing Form 3800 and Form 5884, Work Opportunity Credit with their business’s income tax return.
Tax-exempt employers may claim the WOTC for qualified veterans who started working for the business before 2026. After certification is received, employers must separately file Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. This form is only filed after the employer submits the related employment tax return for the period in which the credit is claimed.
The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any WOTC. The credit will not affect the Social Security tax liability reported on their employment tax returns.
For more information regarding the wages that can be used to determine the credit, please refer to the instructions for either Form 5884 or Form 5884-C.