What Is the 6400 Tax Credit for Employers?

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive for employers who hire individuals from specific groups that have historically faced barriers to employment. This credit helps businesses lower their federal income tax liability and is available for wages paid to qualifying employees who begin work on or before December 31, 2025.

Employer and Employee Eligibility

Eligibility for the WOTC extends to most private, for-profit employers. Certain tax-exempt organizations can also claim the credit against payroll taxes, but only for hiring qualified veterans. To qualify, an employee must be a member of a targeted group defined by the IRS.

The targeted groups include:

• Qualified IV-A Recipients, who are in families receiving certain government assistance.
• Qualified Veterans, who must have served more than 180 days of active duty or been discharged for a service-connected disability.
• Qualified Ex-Felons, who are hired no more than a year after their conviction or release from prison.
• Designated Community Residents, who are individuals aged 18 to 39 living in an Empowerment Zone or Rural Renewal County.
• Vocational Rehabilitation Referrals, who are individuals with a disability referred by a state rehabilitation agency or the Department of Veterans Affairs.
• Qualified Summer Youth Employees, who are 16 or 17, live in an Empowerment Zone, and work between May 1 and September 15.
• Qualified SNAP (Supplemental Nutrition Assistance Program) Recipients.
• Qualified SSI (Supplemental Security Income) Recipients.
• Long-Term Family Assistance Recipients.
• Qualified Long-Term Unemployment Recipients, who have been unemployed for at least 27 consecutive weeks.

Calculating the Credit Amount

The WOTC is calculated based on the hours an employee works and the qualified wages they are paid during their first year. An employer can claim a 25% credit on qualified first-year wages for an employee who works at least 120 hours but fewer than 400 hours.

For employees who work 400 or more hours, the credit increases to 40% of their qualified first-year wages. An employer cannot claim the credit for rehired employees.

The amount of qualified wages used for the calculation is capped and varies by the employee’s target group. For most groups, the maximum qualified wages are $6,000, resulting in a maximum credit of $2,400. For certain qualified veterans, the wage cap can be as high as $12,000, $14,000, or $24,000, leading to a potential maximum credit of $9,600.

The calculation for Long-Term Family Assistance Recipients also differs, extending over two years. The credit is 40% of the first $10,000 of qualified wages in the first year and 50% of the first $10,000 in the second year, for a total maximum credit of $9,000 per employee.

Required Information and Pre-Filing Steps

Before claiming the WOTC, an employer must request and receive certification from a designated State Workforce Agency (SWA) confirming the new hire is a member of a targeted group. This process is initiated by completing IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, which must be completed by both the employer and the job applicant.

On the form, the job applicant provides information about their status as a member of a targeted group. The employer completes their section and submits the form to the SWA, not the IRS.

The employer must submit the completed Form 8850 to their SWA no later than the 28th day after the employee begins work. Failure to meet this 28-day deadline will result in the denial of the certification, making the employer unable to claim the credit for that employee.

How to Claim the Credit

After receiving certification from the SWA and calculating the credit, an employer claims it on their federal income tax return. Taxable employers report the total credit amount on Form 5884, Work Opportunity Credit.

The credit from Form 5884 is then claimed as part of the General Business Credit, which requires filing Form 3800. The General Business Credit combines several business tax credits, and rules may limit the amount taken in a single year. Any unused WOTC can generally be carried back one year and carried forward for up to 20 years.

Forms 5884 and 3800 are submitted with the business’s annual federal income tax return, such as a Form 1120 for corporations or Form 1065 for partnerships. Qualified tax-exempt organizations hiring veterans use Form 5884-C to claim the credit against the employer’s share of Social Security tax.