How Much Is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive encouraging employers to hire individuals from specific groups who have historically faced employment barriers. This credit promotes workforce diversity and helps offset hiring and training costs. The program assists job seekers in transitioning to self-sufficiency. The WOTC is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor (DOL).

Defining Eligible Hires

The Work Opportunity Tax Credit applies to wages paid to individuals who are certified as members of one of several targeted groups. These groups represent job seekers who often encounter challenges in securing employment.

Qualified veterans, particularly those with service-connected disabilities or long periods of unemployment.
Recipients of Temporary Assistance for Needy Families (TANF) who have received assistance for a defined period.
Individuals receiving Supplemental Nutrition Assistance Program (SNAP) benefits for at least three months within a specific timeframe before hiring.
Qualified ex-felons, convicted of a felony and hired within one year of conviction or release.
Designated Community Residents (DCRs) residing in economically distressed areas and meeting age criteria.
Vocational rehabilitation referrals, individuals with disabilities completing a rehabilitation plan.
Qualified summer youth employees (16-17 years old) working during summer in designated community areas.
Supplemental Security Income (SSI) recipients, receiving benefits within 60 days of their hiring date.
Long-term family assistance recipients, defined by extensive TANF assistance.
Qualified long-term unemployment recipients, unemployed for at least 27 consecutive weeks and receiving unemployment compensation.

Determining the Credit Amount

The Work Opportunity Tax Credit amount depends on qualified wages paid and the employee’s target group. For most groups, the credit is a percentage of the first $6,000 in qualified wages paid during the employee’s first year. Qualified wages include all remuneration subject to Federal Unemployment Tax Act (FUTA) taxes.

The credit percentage varies by hours worked. For 120 to 399 hours, the credit is 25% of qualified first-year wages. For 400 or more hours, it increases to 40%. This means the maximum credit for most target groups is $2,400 ($6,000 x 40%).

Some target groups have different wage caps and credit calculations. For example, the wage limit for qualified summer youth employees is $3,000, leading to a maximum credit of $1,200. Long-term family assistance recipients have a higher wage limit of $10,000, and the credit can apply to both first and second-year wages, allowing for a potential credit of up to $4,000 in the first year and 50% of up to $10,000 in the second year, with a combined cap of $10,000.

For veterans unemployed for at least four weeks but less than six months, maximum qualified wages are $12,000. If unemployed for six months or more, the maximum qualified wages increase to $14,000. The highest credit for veterans is for those with a service-connected disability who were unemployed for at least six months, with a $24,000 qualified wage cap, yielding up to $9,600.

Required Documentation and Certification

Before an employer can claim the Work Opportunity Tax Credit, specific documentation must be completed and submitted to the appropriate state agency. The process begins with IRS Form 8850, known as the Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This form must be completed by both the job applicant and the employer. The applicant provides personal details and answers questions to determine potential eligibility for a target group on the first page. The employer then completes the second page with business contact information and key employment dates.

Employers must also submit a Department of Labor (DOL) Employment and Training Administration (ETA) form alongside Form 8850. This is typically ETA Form 9061, the Individual Characteristics Form (ICF), or ETA Form 9062, the Conditional Certification Form, if pre-screened by a State Workforce Agency (SWA). Both forms help the SWA determine WOTC program eligibility.

A strict deadline governs form submission. Employers must submit Form 8850 and the relevant ETA form to the designated SWA within 28 calendar days of the employee’s start date. Missing this deadline results in forfeiture of the credit for that hire, as the Department of Labor instructs SWAs to reject untimely applications. SWA certification is a mandatory prerequisite for claiming the tax credit.

The SWA reviews submitted documentation to verify employee eligibility. Employers should retain copies of all submitted forms and SWA certification as proof of eligibility when claiming the credit with the IRS. Timely and accurate completion of this paperwork is crucial for successful WOTC claims.

The Application and Claim Process

Once the necessary documentation has been gathered, forms completed, and certification received from the State Workforce Agency, the employer can proceed to formally claim the Work Opportunity Tax Credit with the Internal Revenue Service. This final step involves submitting specific forms to the IRS.

The primary form used for this purpose is IRS Form 5884, titled Work Opportunity Credit. This form is completed by the employer to calculate the final credit amount based on the certified employee’s qualified wages and hours worked. Form 5884 must be filed as part of the employer’s annual income tax return. For corporations, this would typically involve filing with Form 1120. Sole proprietors report the credit on their personal income tax return, often as part of Schedule C or Schedule F, while partnerships use Form 1065. The calculated credit from Form 5884 is then reported on Form 3800, the General Business Credit, which consolidates various business credits.

Tax-exempt organizations, described in Section 501, can also claim the WOTC, but only for qualified veterans hired before 2026. These organizations use Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. This credit is applied against the employer’s share of Social Security tax.

The Work Opportunity Tax Credit is generally nonrefundable, meaning it can reduce a taxpayer’s liability to zero but will not result in a refund if the credit amount exceeds the tax owed. Any unused portion of the credit can be carried back one year to offset prior tax liabilities or carried forward for up to 20 years, providing flexibility for businesses to utilize the credit over time. Employers must ensure that the certified forms and Form 5884 are properly attached to their tax return when filing.