Fed Tax Incentives: Work Opportunity Tax Credit
Background
The Work Opportunity Tax Credit (WOTC) is a federal general business credit under IRC § 51 that incentivizes employers to hire individuals from specified “targeted groups” that face barriers to employment. IRC §§ 51(a), (b); 38(b)(5).
Although the PATH Act extended WOTC through 2019, subsequent legislation—including the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as Division EE of the Consolidated Appropriations Act, 2021, and later extenders—has extended WOTC through December 31, 2025. Employers may claim WOTC for eligible hires who begin work before January 1, 2026, subject to certification by the State Workforce Agency (SWA). See § 51(c)(4), (d)(13); Consolidated Appropriations Act, 2021, Pub. L. No. 116‑260, div. EE, § 119, 134 Stat. 1182 (2020); IRS Tax Tip 2024‑85 (Oct. 28, 2024).
Credit Mechanics
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Credit amount (IRC § 51(i)(3)):
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40% of qualified first-year wages if employee works ≥ 400 hours.
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25% if employee works 120–399 hours.
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No credit if < 120 hours.
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Maximum credit:
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Up to $9,600 per qualified hire, depending on target group.
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Wage ceilings (IRC § 51(b)(3)):
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Most groups: $6,000 (max credit $2,400).
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Veterans: up to $24,000 (max credit $9,600).
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Long-term TANF: $10,000/year for two years.
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See also IRS WOTC guidance.
As outlined above, the WOTC may potentially reduce an employer’s federal income tax liability by up to $9,600 per qualified hire (depending on the target group and applicable wage ceilings), IRC §§ 51(a)–(b); 51(b)(3).
An employer may claim a credit equal to 40% of an eligible employee’s qualified first‑year wages if the employee works ≥ 400 hours, and 25% if the employee works 120–399 hours; no credit is allowed if < 120 hours. WOTC is a nonrefundable component of the general business credit and is limited by tax liability, subject to the carry rules in § 39. §§ 51(i)(3), 38(a), 39(a).
The limit of wages that are WOTC eligible varies by the characteristics of the worker. The most common wage ceiling is $6,000 (for a maximum credit of $2,400 per employee), though some categories allow higher ceilings (e.g., qualified veterans up to $24,000; long‑term TANF up to $10,000 per year for two years). Employers must obtain SWA certification by submitting Form 8850 within 28 days of the start date (pre‑screening on or before the job offer), and claim WOTC as part of the general business credit with carryback 1 year and carryforward 20 years under § 39. §§ 51(b)(3), 51(d)(13), 39(a); IRS Tax Tip 2024‑85 (Oct. 28, 2024).
To be eligible for the credit, employers are required to timely file requests for certification with State Workforce Agencies (“SWAs”). Qualified tax‑exempt employers hiring qualified veterans may claim a WOTC against the employer’s Social Security tax on Form 5884‑C. I.R.S., About Form 5884‑C; IRS Tax Tip 2024‑85 (Oct. 28, 2024).
Eligible Worker Populations (max credit 40% of eligible wages)
This section describes the populations eligible for the WOTC under its most recent authorization. The current targeted groups include the following (IRC § 51(d)(1); IRS Tax Tip 2024‑85 (Oct. 28, 2024):
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(1) Veterans (maximum WOTC-eligible wages of $6,000 to $24,000, depending on subcategory). § 51(d)(3).
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(2) Temporary Assistance for Needy Family (TANF) Recipients (maximum WOTC-eligible wages of $6,000). § 51(d)(2)(A).
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(3) Long-Term TANF Recipients (maximum WOTC-eligible wages of $10,000 per year for up to two years). § 51(d)(2)(B).
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(4) Supplemental Nutrition Assistance Program (SNAP) Recipients (maximum WOTC-eligible wages of $6,000). § 51(d)(8).
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(5) Designated Community Residents (maximum WOTC-eligible wages of $6,000). § 51(d)(5).
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(6) Vocational Rehabilitation Referrals (maximum WOTC-eligible wages of $6,000). § 51(d)(6).
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(7) Ex-Felons (maximum WOTC-eligible wages of $6,000). § 51(d)(4).
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(8) Supplemental Security Income (SSI) Recipients (maximum WOTC-eligible wages of $6,000). § 51(d)(1)(H).
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(9) Summer Youth Employees (maximum WOTC-eligible wages of $3,000). § 51(d)(7).
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(10) Long-Term Unemployed (maximum WOTC-eligible wages of $6,000). § 51(d)(1)(J); IRS Tax Tip 2024‑85 (Oct. 28, 2024).
Employer Benefits
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Depending on the target group of the new hire, an employer may reduce their federal income tax liability by up to $9,600 per each eligible employee hired.
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The credit offsets an employer’s cost for recruiting, onboarding, and training of new employees.
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There is no cap on the number of eligible people an employer can hire or the amount of tax credits that can be claimed each year.
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Private companies (C, S, partnerships/LLCs) and certain nonprofits (for qualified veterans via payroll credit) can qualify. § 51; I.R.S., About Form 5884‑C.
Benefits for American Workers
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Supports workers who have consistently faced significant barriers to employment.
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Incentivizes workplace diversity and facilities access to jobs for American workers.
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Helps workers move from economic dependency into self-sufficiency. See also § 51(d); IRS Tax Tip 2024‑85 (Oct. 28, 2024).
Calculation of Credit and Maximum Credits
The credit equals 40% of qualified first‑year wages (≥ 400 hours) or 25% (120–399 hours); no credit if < 120 hours. § 51(i)(3). Qualified wages are subject to group‑specific ceilings; for example, ex‑felons (up to $6,000), veterans (up to $24,000), long‑term TANF (up to $10,000/year for two years). § 51(b)(3).
Example: For a qualified ex‑felon, wage ceiling $6,000 → 40% × $6,000 = $2,400 max credit if ≥ 400 hours worked. § 51(b)(3), (i)(3).
Mechanics of Claiming the WOTC (Pre-screening and Certification)
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An employer must obtain SWA certification that an individual is a member of a targeted group before claiming the credit. § 51(d)(13).
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The employer must submit Form 8850 to the SWA within 28 days after the employee begins work; pre‑screening is completed on or before the date a job offer is made. I.R.S., Instructions for Form 8850.
The employer typically completes ETA Form 9061 (or the employee provides ETA Form 9062 if conditionally certified). U.S. DOL ETA WOTC Guidance. -
Upon certification, the employer claims WOTC via Form 5884 and Form 3800 as part of the general business credit (subject to § 39 carry rules). I.R.S., About Forms 5884 and 3800; § 39(a).
Eligible Employers - Limitations on the Credits
WOTC is nonrefundable and limited to the employer’s tax liability (with § 39 carryback one year/forward 20 years). §§ 38(c), 39(a). Coordinate with § 280C(a) by reducing wage deductions by the credit amount.
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(1) Taxable Employers. File Form 5884 and Form 3800 with the appropriate income tax return; generally, a claim can be made by amended return within the applicable limitations. I.R.S., Instructions for Forms 5884 & 3800.
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(2) Tax‑Exempt Employers .
(1) Taxable Employers
After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
(1) Form 5884 (with instructions)
(2) Form 3800 (with instructions)
(3) Your business’s related income tax return and instructions (i.e., Forms 1040, 1041, 1120, etc.). Employers generally have three years starting from the due date for filing a tax return to claim the WOTC. See IRS Instructions for Form 3800.
(2) Tax-exempt Employers (Qualified Veterans Only)
Qualified § 501(c) organizations may claim WOTC for qualified veterans as a credit against the employer Social Security tax on Form 5884‑C (after certification on Form 8850); do not reduce required deposits in anticipation. I.R.S., About Form 5884‑C; IRS Tax Tip 2024‑85 (Oct. 28, 2024).
IRS Link(s) & Support for additional background:
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About Form 5884, Work Opportunity Credit
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About Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans
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About Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit
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Form 8850 must be filed within 28 days of the start date (and pre‑screening at/ before offer). I.R.S., Form 8850 Instr.
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