What is the Work Opportunity Tax Credit (WOTC)?
The work opportunity tax credit (WOTC) can be worth up to $9,600 per qualified employee for businesses that hire workers from certain targeted groups facing unusually high rates of unemployment or other employment challenges. However, the credit is only available for employees who start work before 2026.
Key Takeaways
- A business may be eligible for the work opportunity tax credit (WOTC) if it hires workers from certain targeted groups of people who often face employment barriers. The goal is to encourage the employment of people who might otherwise be left out of the workforce.
- The WOTC is usually 40% of up to $6,000 in first-year wages if the employee works at least 400 hours. However, in some cases, the maximum WOTC amount ranges from $1,200 to $9,600 per employee and is determined by the employee's group, wages, and total hours worked.
- To be eligible for the WOTC, employers must first obtain certification that a hired worker is a member of one of the designated targeted groups. This certification must be requested by filing IRS Form 8850 with the state's workforce agency, typically within 28 days of the employee's start date.
- Ten distinct categories define the targeted groups for the WOTC, including veterans, SNAP recipients, ex-felons, summer youth employees, TANF recipients, SSI recipients, long-term unemployment recipients, vocational rehabilitation referrals, long-term family assistance recipients, and designated community residents.
The work opportunity tax credit (WOTC) rewards businesses that hire workers from certain targeted groups who might otherwise be overlooked in the job market. Businesses of any size can claim the credit for as many eligible workers they employ.
The credit amount depends on several factors, including the eligible employee’s targeted group, wages, and number of hours worked. There’s also a maximum credit amount per employee, which runs from $1,200 to $9,600, depending on the employee's targeted group and length of employment.
The WOTC is a nonrefundable federal tax credit. As a result, it can reduce your tax bill to $0, but it won’t trigger a tax refund if the credit amount is greater than your tax liability before the credit is applied.
If you own a business that hires members of a targeted group, you can claim the WOTC as a general business credit on your federal income tax return (or on your business’s return). But to qualify for the credit, your business must first obtain certification that a claimed worker is actually a member of a WOTC targeted group.
The credit is set to expire in 2026. So, unless it’s extended, the WOTC won’t be available for employees who start work after December 31, 2025.
Targeted groups eligible for the work opportunity tax credit
You can only claim the WOTC for an employee who is a member of a “targeted group.” But before claiming the credit, each eligible employee must also be certified as a member of a targeted group.
You can obtain WOTC certifications by filing IRS Form 8850 with the state workforce agency (SWA) for the state where the employee is going to work (the Department of Labor has a list of SWAs on its website). The form generally must be filed with the SWA within 28 days after the employee starts work. You must also send the SWA:
- ETA Form 9062 if the employee received a conditional certification from an SWA or authorized participating agency (such as Jobs Corps)
- ETA Form 9061 if the worker didn't receive a conditional certification
- ETA Form 9175 if the job applicant is a qualified long-term unemployment recipient
An employee may be certified for WOTC purposes by satisfying the requirements for at least one of the following 10 targeted groups:
- Temporary Assistance for Needy Families (TANF) recipients. People who are members of a family on TANF – a program providing assistance to needy families with dependent children – if assistance was received for any nine months during the 18 months before being hired.
- Supplemental Nutrition Assistance Program (SNAP) recipients. Adults 18 to 39 years old who are members of a family that received food stamp benefits under SNAP for either:
-
- the previous six months
- at least three of the previous five months
- Veterans. This group includes veterans who were:
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- members of a family that received food stamps through SNAP for at least three months during the 15 months before being hired
- unemployed for at least four weeks during the year before being hired
- disabled veterans (i.e., entitled to compensation for a service-connected disability) and either (a) hired within one year of leaving active duty, or (b) unemployed for at least six months during the year before being hired
- Ex-felons. People convicted of a felony and hired within one year of their conviction or release from prison.
- Summer youth employees. Teenagers who are 16 or 17 years old when hired (or on May 1, if later), work for the employer for the first time between May 1 and September 15 and live in an empowerment zone.
- Supplemental Security Income (SSI) recipients. People who receive SSI—a federal income supplement program designed to help elderly, blind, and disabled people who have little or no income—for any month ending during the 60 days before being hired.
- Long-term family assistance recipients. People who are members of a family that:
-
- received TANF payments for at least 18 consecutive months before being hired
- received TANF payments for an 18-month period that ended within two years of being hired
- is no longer eligible for TANF payments due to limits on the maximum time period for payments and is hired within two years of losing eligibility
- Qualified long-term unemployment recipients. People who were unemployed for at least 27 consecutive weeks when hired and received unemployment compensation during at least some of that time.
- Designated community residents. Adults 18 to 39 years old who live in an empowerment zone or rural renewal county.
- Vocational rehabilitation referrals. People who have a physical or mental disability and have been referred to the employer while receiving or upon completion of certain rehabilitative services.
Employees who aren’t eligible for the work opportunity tax credit
You can’t claim the WOTC for an employee who:
- is related to you
- owns more than 50% of your business
- is your dependent
- previously worked for you
- doesn’t work at least 120 hours for you
More than 50% of the wages you pay to an employee must also be for work in your trade or business. So, for example, you can’t claim the WOTC for an employee if most of the money you pay them is for work as a maid, nanny, or gardener, or similar position in your home.
Amount of the work opportunity tax credit
The WOTC is generally equal to 40% of up to $6,000 of qualified wages paid to an eligible employee during their first year working for the business claiming the credit. So, in most cases, the maximum credit is $2,400 per eligible employee ($6,000 x .40 = $2,400).
But the credit amount can be higher or lower for certain employees. This happens because of the following adjustments to the credit percentage, eligible wages, and/or wage limit:
- Employees working fewer than 400 hours. The WOTC is only worth 25% of eligible wages for employees who work at least 120 hours, but less than 400 hours, for the employer. In that case, the maximum credit is $1,500 ($6,000 x .25 = $1,500).
- Summer youth employees. The wage limit for summer youth employees is $3,000. As a result, the maximum credit for them is $1,200 ($3,000 x .40 = $1,200).
- Long-term family assistance recipients. The wage limit for long-term family assistance recipients is $10,000, which means the maximum WOTC for their first-year wages is $4,000 ($10,000 x .40 = $4,000).
Plus, 50% of a long-term family assistance recipient’s second-year wages are eligible for the WOTC. But the $10,000 wage limit applies to the combined total of first- and second-year wages.
Veterans. The wage limits are increased to the following amounts for certain eligible veterans:
- $12,000 for veterans with a service-connected disability hired within one year of leaving active duty, making the maximum WOTC for them equal to $4,800 ($12,000 x .40 = $4,800),
- $14,000 for veterans who were unemployed for at least six months during the year before being hired, which results in a $5,600 maximum credit for them ($14,000 x .40 = $5,600), and
- $24,000 for veterans with a service-connected disability who were unemployed for at least six months during the year before being hired, so that the maximum credit for them is $9,600 ($24,000 x .40 = $9,600).
TurboTax Tip:
Wages used to calculate the WOTC generally can’t also be used to calculate other wage-based credits, such as the empowerment zone employment credit or employer credit for paid family and medical leave. However, you might be able to claim the WOTC and another wage-based credit for a single worker if you don’t use the same wages to calculate both credits.
Qualified wages for the work opportunity tax credit
Most first-year wages paid to eligible employees qualify for the WOTC (although there are special rules for agricultural and railroad workers). There are a few exceptions, though. For instance, you can’t claim the WOTC for an employee’s wages if you’re receiving payments through a federal on-the-job training program for that employee.
Wages paid to replacement workers during a strike or lockout don’t count, either.
The targeted group requirements eliminate some wages, too. For example, you can’t claim the WOTC for wages paid to a summer youth employee before or after any 90-day period between May 1 and September 15, or during any time they don’t live in an empowerment zone. The credit is also unavailable for wages paid to a designated community resident during any period they don’t live in an empowerment zone or rural renewal county.
Tax-exempt employers and the work opportunity tax credit
Tax-exempt organizations can only claim the WOTC for qualified veterans. The credit is claimed against payroll taxes, not income taxes.
How to claim the work opportunity tax credit
If you’re claiming the WOTC, you must first complete Form 5884 to calculate the credit amount (tax-exempt organizations file Form 5884-C to claim the credit).
Since the WOTC is included in your general business credit, which consists of any business credits carried forward from prior years and the total of current-year business credits, the amount from Form 5884 is reported on Form 3800.
Once your general business credit is calculated on Form 3800, individual business owners filing Form 1040 report that amount on Schedule 3.
Also note that the general business credit is capped each year. But if part of your WOTC can’t be used because of the limit, you can generally carry the unused portion back to the previous year’s tax return, and then carry any amount that is still unused forward to future tax returns for up to 20 years (or until the unused amount is completely used).
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