How to Claim the IRS Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive for employers who hire individuals from groups that have faced significant barriers to employment. The credit directly reduces an employer’s federal income tax liability and is not limited by the number of eligible individuals an employer can hire. This allows the potential credit to grow with each qualifying new employee.

The program is a collaboration between the Internal Revenue Service (IRS) and the U.S. Department of Labor. To benefit from the WOTC, businesses must follow a specific process of screening, certification, and tax filing. The credit is available through the end of 2025.

Employer and Employee Eligibility

Nearly all private-sector employers are eligible to claim the WOTC, regardless of their size or industry. Certain tax-exempt organizations can also participate, but they can only claim the credit for wages paid to qualified veterans who begin work before 2026.

To qualify, a new hire must be a member of one of ten “targeted groups.” One group is the Qualified IV-A Recipient, which includes individuals from a family receiving Temporary Assistance for Needy Families (TANF). Another group is Qualified Veterans, which has subcategories based on factors like receiving SNAP (food stamps), unemployment duration, or a service-connected disability.

The program also includes Qualified Ex-Felons, who must be hired no more than a year after their conviction or release from prison. A Designated Community Resident (DCR) is an individual between 18 and 40 who lives within a federally designated Empowerment Zone or Rural Renewal County. A Vocational Rehabilitation Referral includes individuals with a physical or mental disability referred to the employer through a rehabilitation agency or the Department of Veterans Affairs.

Other targeted categories include Supplemental Nutrition Assistance Program (SNAP) recipients between 18 and 40 years old from a household that has received benefits for a set period. Supplemental Security Income (SSI) recipients are eligible if they received such benefits in any month ending within the 60-day period before being hired. The list also includes Summer Youth Employees, Long-Term Family Assistance Recipients, and Qualified Long-Term Unemployment Recipients.

Calculating the Credit Amount

The WOTC is calculated based on the hours an employee works and the qualified wages they earn during their first year. The credit operates on a two-tiered system. For an employee who works at least 120 hours but fewer than 400 hours, the employer can claim a credit of 25% of their qualified wages. If the employee works 400 or more hours, the credit increases to 40% of qualified wages.

The amount of “qualified wages” used for the calculation is capped, and this cap varies by the employee’s targeted group. For most groups, the credit is calculated on the first $6,000 of wages. This results in a maximum credit of $2,400 for an employee working over 400 hours ($6,000 x 40%) or $1,500 for an employee working between 120 and 399 hours ($6,000 x 25%).

Certain targeted groups have higher wage caps. For long-term family assistance recipients, the wage cap is $10,000, for a maximum credit of $4,000. The caps are highest for certain qualified veterans, where the wage cap can be as high as $12,000, $14,000, or $24,000, resulting in a maximum credit of up to $9,600 per hire.

For example, if an employer hires a qualified ex-felon who works 550 hours, the 40% rate applies to the first $6,000 of wages, giving the employer a $2,400 tax credit.

Required Information and Pre-Certification Form

To claim the WOTC, an employer must complete IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit.” This form is the official request to the state to certify that a new employee is a member of a targeted group. To complete Form 8850, the employer needs the new hire’s full name, address, and social security number.

The employee completes the first page of the form, which must be signed and dated on or before the day the job offer is made. The employer then completes the second page with business information and the employee’s start date. Along with Form 8850, employers must also submit either ETA Form 9061, “Individual Characteristics Form,” or ETA Form 9062, “Conditional Certification.”

Form 9061 provides details about the new hire, while Form 9062 is used if an individual was already conditionally certified by a participating agency. The employer must submit the completed Form 8850 and any accompanying ETA forms to their designated State Workforce Agency (SWA) within 28 days of the employee’s start date. Failure to meet this strict deadline will result in the denial of the tax credit for that employee. These forms should not be sent to the IRS at this stage.

The Certification and Tax Filing Process

After submitting the pre-screening forms, the State Workforce Agency (SWA) will review the documentation and, if approved, issue a formal certification to the employer. This certification authorizes the employer to claim the tax credit. Once certified, for-profit businesses use Form 5884, “Work Opportunity Credit,” to calculate the total credit. The final amount from Form 5884 is then reported on Form 3800, General Business Credit, which is filed with the company’s main income tax return.

The process is different for qualified tax-exempt organizations hiring eligible veterans. These organizations claim the credit against their share of social security payroll taxes using Form 5884-C. This form is filed with their quarterly employer tax return, Form 941.

The WOTC is a nonrefundable tax credit, meaning it can reduce tax liability to zero, but no portion is paid as a refund if it exceeds the tax owed. Any unused credit amount can be carried back to the previous tax year or carried forward to future tax years, subject to general business credit rules.