The Work Opportunity Tax Credit

For employers looking to strengthen their workforce while benefiting from valuable tax incentives, the Work Opportunity Tax Credit (WOTC) offers a meaningful opportunity. This federal program, extended through December 31, 2025, rewards businesses that hire individuals who have faced barriers to employment.

What Is the Work Opportunity Tax Credit?

The WOTC provides a federal tax credit to employers that hire workers from specific target groups. These groups include individuals who have experienced long-term unemployment, recipients of public assistance, or those returning to the workforce after incarceration.

Eligible groups include:
• Recipients of long-term family assistance or Temporary Assistance for Needy Families (TANF)
• Long-term unemployed individuals
• Recipients of Supplemental Nutrition Assistance Program (SNAP) or Supplemental Security Income (SSI) benefits
• Qualified veterans, including those with service-connected disabilities
• Designated community residents living in empowerment zones or rural renewal counties
• Individuals referred through vocational rehabilitation programs
• Formerly incarcerated individuals
• Summer youth employees living in empowerment zones

How Employers Qualify

To claim the credit, employers must receive certification that the new hire belongs to one of the eligible groups. Certification is obtained by submitting IRS Form 8850, Pre-Screening Notice and Certification Request, to the employer’s state workforce agency within 28 days of the employee’s start date. This form is not sent to the IRS but is required for eligibility.

Calculating and Claiming the Credit

Once certification is received, businesses can calculate the credit using Form 5884, Work Opportunity Credit, and then claim it on Form 3800, General Business Credit, when filing their federal tax return. The credit is typically based on wages paid during the employee’s first year of work.

Special Rule for Tax-Exempt Employers

Tax-exempt organizations can also benefit — but only when hiring qualified veterans before 2026. In this case, the credit is applied against the employer’s share of Social Security taxes and claimed using Form 5884-C. The IRS advises that these organizations not reduce payroll deposits while awaiting the credit.

Limitations and Carryover Rules

For taxable businesses, the credit is limited to the organization’s income tax liability, though any unused credit can be carried forward or back according to general IRS rules. For tax-exempt entities, the limit applies to the amount of Social Security tax owed on qualifying wages.

Why It Matters

The WOTC not only helps employers offset tax liability but also promotes community impact by encouraging the hiring of individuals who may otherwise face challenges entering the workforce.

If you’re considering adding new team members, our tax professionals can help you determine whether your business qualifies for the Work Opportunity Tax Credit and guide you through the certification process.

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