Work Opportunity Tax Credit (“WOTC”)
What is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit (“WOTC”) is a general business credit provided under section 51 of the Internal Revenue Code jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL). The WOTC is available for wages paid to certain individuals who begin work on or before December 31, 2025. The WOTC may be claimed by any employer that hires, pays or incurs wages to certain individuals certified by a designated local agency (sometimes called a state workforce agency) as a member of one of 10 targeted groups. The WOTC provides for a general business credit of up to $9,600 to employers that hire and retain individuals from certain targeted groups that have faced barriers to employment.
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On or before the day that an offer of employment is made, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated local agency located in the state in which the business is located (where the employee works). Additional forms may be required by the DOL to obtain certification. Following receipt of a certification from the designated local agency that the employee is a member of one of the 10 targeted groups, taxable employers file Form 5884 (Work Opportunity Credit) and tax-exempt employers file Form 5884-C (Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans) to claim the WOTC.
Employers can hire employees from the following targeted groups for WOTC.
- Qualified IV-A Recipient
- Qualified Veteran
- Qualified Ex-Felon
- Designated Community Resident (DCR)
- Vocational Rehabilitation Referral
- Qualified Summer Youth Employee
- Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient
- Qualified Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who:
- is in their first year of employment;
- is certified as being a member of a targeted group; and
- performs at least 400 hours of services for that employer.
Thus, the maximum tax credit is generally $2,400, except in the following cases:
- The wage limitation is $12,000 (a $4,800 maximum credit) in the case of a qualified veteran with a service-connected disability who has a hire date not more than one year after having been discharged from active duty in the armed forces.
- The wage limitation is $14,000 (a $5,600 maximum credit) in the case of a qualified veteran without a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date that equal or exceed six months.
- The wage limitation is $24,000 (a $9,600 maximum credit) in the case of a qualified veteran with a service-connected disability having aggregate periods of unemployment during the one-year period ending on the hire date that equal or exceed six months.