What Is the Section 51 Work Opportunity Tax Credit?

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 program encourages hiring these individuals to promote a more inclusive workforce. The credit directly reduces an employer’s federal income tax liability. The program is jointly administered by the Internal Revenue Service (IRS) and the Department of Labor and has been extended through December 31, 2025.

Employer and Employee Eligibility

Nearly all private-sector, for-profit employers are eligible to claim the Work Opportunity Tax Credit, regardless of size, and there is no limit on the number of eligible employees an employer can claim. Certain tax-exempt organizations under Internal Revenue Code section 501(c) can also participate by claiming the credit against the employer’s share of Social Security taxes for hiring qualified veterans. The credit is not available for wages paid to rehires.

The new employee must be certified as a member of a targeted group, which include:

• Qualified IV-A Recipient: An individual in a family that received Temporary Assistance for Needy Families (TANF) for any nine-month period during the 18 months before being hired.
• Qualified Veteran: A veteran in a family that received Supplemental Nutrition Assistance Program (SNAP) benefits for at least three months in the 15 months before hiring, or a veteran entitled to compensation for a service-connected disability and hired within a year of discharge.
• Qualified Ex-Felon: An individual convicted of a felony who is hired no more than one year after their conviction or release from prison.
• Designated Community Resident: An individual aged 18 to 39 who lives within a federally designated Empowerment Zone or Rural Renewal County.
• Vocational Rehabilitation Referral: An individual with a physical or mental disability referred to the employer after completing rehabilitation services from a state-certified agency or the Department of Veterans Affairs.
• Qualified Summer Youth Employee: An individual aged 16 or 17 who lives in an Empowerment Zone and works for the employer between May 1 and September 15.
• Qualified SNAP Benefits Recipient: An individual aged 18 to 39 in a family that received SNAP benefits for the six months ending on the hiring date, or for at least three of the five months ending on the hiring date.
• Qualified SSI Recipient: An individual who received Supplemental Security Income benefits for any month within the 60-day period ending on the hiring date.
• Long-Term Family Assistance Recipient: A member of a family that received TANF payments for at least 18 consecutive months ending on the hiring date, or whose family’s TANF assistance ended due to time limits, if hired within two years of the termination.
• Qualified Long-Term Unemployment Recipient: An individual unemployed for at least 27 consecutive weeks who received unemployment compensation during that period.

Calculating the Credit Amount

The credit amount is based on the number of hours the employee works during their first year. If an employee works at least 120 hours but fewer than 400, the employer can claim a credit of 25% of the employee’s qualified first-year wages. For an employee who works 400 or more hours, the credit increases to 40% of their qualified first-year wages.

“Qualified wages” are the FUTA-subject wages paid to an employee during their first year of employment, not including amounts used for other tax credits. The amount of qualified wages used for the calculation is capped based on the employee’s targeted group. For most groups, the credit is calculated on the first $6,000 of wages, resulting in a maximum credit of $1,500 (25% rate) or $2,400 (40% rate).

Certain groups have different wage caps. The cap for a qualified summer youth employee is $3,000, for a maximum credit of $1,200. For long-term family assistance recipients, the limit is $10,000 in the first year, and the credit can extend to a second year, covering 50% of the first $10,000 in second-year wages.

Qualified veterans also have increased wage caps. A veteran with a service-connected disability hired within one year of leaving active duty has a wage cap of $12,000, for a maximum credit of $4,800. A veteran unemployed for at least six months has a cap of $14,000, for a maximum credit of $5,600. The cap is $24,000 for a veteran with a service-connected disability who was also unemployed for at least six months, for a maximum credit of $9,600.

Required Pre-Screening and Certification

Before claiming the WOTC, an employer must complete a pre-screening and certification process using IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This form is used to request certification from the State Workforce Agency (SWA) that the new employee is a member of a targeted group. The form must be signed by both the job applicant and the employer.

The job applicant must complete their portion of Form 8850 on or before the day a job offer is made. The form contains a checklist of the WOTC targeted groups, and the applicant indicates which categories may apply. After the employee is hired, the employer completes their section with business information and hiring dates.

Once complete, the employer must submit Form 8850 to the SWA for the state where the employee will work. This must be done no later than 28 days after the employee’s start date. Missing this deadline will result in the denial of the certification and the loss of the tax credit. Employers may also submit the Department of Labor’s ETA Form 9061 to provide additional information for verification.

The SWA reviews the submitted forms to verify the employee’s eligibility. If the employee qualifies, the SWA issues a formal certification to the employer, which is the document that permits claiming the tax credit. Employers should retain copies of all submitted forms and the final certification for their records.

Claiming the Credit on Your Tax Return

After receiving certifications from the SWA, for-profit employers use IRS Form 5884, Work Opportunity Credit, to calculate the total credit. The form combines the credit amounts for all certified employees based on their wages and hours worked during the tax year.

The total from Form 5884 is carried to Form 3800, General Business Credit, and filed with the business’s main income tax return. The WOTC is combined with other business credits on Form 3800. If the credit cannot be fully used in the current year, it can generally be carried back one year and forward for up to 20 years.

The procedure is different for eligible tax-exempt organizations. They do not file Form 5884 but instead use Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. This form is used to claim the credit and is filed separately from other employment tax returns.