Glossary
Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a federal tax credit incentivizing employers to hire members of certain targeted groups. Employers must hire these workers before 2026 and obtain a certification from the relevant state agency affirming the individual’s status as a member of a targeted group to claim the credit.
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What is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit is a federal tax credit available to employers who hire members of certain targeted groups — specifically those who have consistently faced barriers to employment. The WOTC program reduces the employer's wage deduction dollar for dollar. Previously scheduled to sunset at the end of 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the Work Opportunity Tax Credit through the end of 2025 with the goal of incentivizing employers to hire diverse candidates and facilitate access to jobs for American workers from certain targeted groups.
Employers must hire these workers before 2026, obtain certification affirming the individual’s status as a member of a targeted group, and submit the completed IRS Form 8850 to the appropriate state workforce agency (SWA) within 28 days after the individual begins work.
The employer must receive a certification from the state workforce agency that the individual is, in fact, a member of a targeted group before claiming the Work Opportunity Tax Credit for the individual. The Department of Labor maintains a list of the names, addresses, phone and fax numbers, and email addresses of the Work Opportunity Tax Credit coordinator for each state workforce agency.
A fast-track certification process applies to certain qualified veterans.
What is WOTC Form 8850?
Form 8850 is a “Pre-Screening Notice and Certification Request for the Work Opportunity Credit” form used to certify an employee’s eligibility for the Work Opportunity Tax Credit. Employers must complete the Form 8850 Pre-Screening Notice and Certification Request on or before the employment offer is made, and the employee and the employer must sign it. To be able to claim the Work Opportunity Tax Credit, the employer must submit the completed Form 8850 to the state workforce agency within 28 days after the individual begins work. The U.S. Department of Labor may require additional forms.
Is Form 8850 filed with the IRS?
No, Form 8850 is not filed with the IRS. Instead, employers file Form 8850 with their state workforce agency in which their business is located — where the employee works — to certify an individual as a member of a targeted group for purposes of qualifying for the work opportunity credit.
Who is eligible for the Work Opportunity Tax Credit?
The work opportunity tax credit can be claimed by employers hiring persons who fall into one of the ten designated target groups — generally economically or physically disadvantaged persons, including qualified veterans — who begin work before January 1, 2026. Targeted groups that are eligible for the WOTC are listed below:
| Targeted Group | Description |
|---|---|
Qualified IV-A recipient |
An individual who is a member of a family that received Temporary Assistance for Needy Families (TANF) payments for any nine months during the 18-month period before the hiring date. |
Qualified veteran |
A veteran who is: · A member of a family that received Supplemental Nutrition Assistance Program (SNAP) benefits for a minimum period of time. · Unemployed for a minimum period of time. · Entitled to compensation for a service-connected disability and either hired within one year after being discharged or released from active duty in the U.S. Armed Forces or was unemployed for a minimum period of time before the hiring date. |
Qualified ex-felon |
An individual who has been convicted of a felony under any federal or state statute and is hired within one year after the conviction or release from prison for that felony. |
Designated community resident |
An individual who is aged 18 to 39 on the hiring date and lives within an empowerment zone or rural renewal county. |
Vocational rehabilitation referrals |
An individual who has a physical or mental disability resulting in a substantial handicap to employment and who was referred to the employer while receiving or after completing rehabilitation services by a rehabilitation agency approved by the state, an employment network under the Ticket to Work program, or the Department of Veterans Affairs. |
Qualified summer youth employees |
An individual who performs services for the employer between May 1 and September 15, is age 16 or 17 on the hiring date (or, if later, on May 1), has never worked for the employer before, and lives within an empowerment zone. |
Qualified supplemental nutrition assistance (SNAP) benefits recipient |
An individual who is age 18-39 on the hiring date and is either a member of a family that has received SNAP benefits for a minimum period of time. |
Qualified SSI recipient |
An individual who is receiving supplemental security income benefits for any month that ended during the 60-day period ending on the hiring date. |
Long-term family assistance recipient |
An individual who is a member of a family that receives or received TANF payments for a minimum period of time before the hiring date. |
Qualified long-term unemployment recipients |
An individual who is in a period of unemployment of at least 27 consecutive weeks as of the day before the beginning work for the employer, or, if earlier, the day the individual completes the Form 8850 pre-screening notice. The individual must have received unemployment compensation under state or federal law for some or all of the 27-week period. |
Who is not eligible for the WOTC?
The employer may not claim a Work Opportunity Tax Credit for wages paid to or incurred on behalf of the following:
- A dependent of the employer
- Certain relatives of the employer
- Employees for whom the employer is receiving federal job-training funds or work supplementation payments
- Re-hired employees
- Replacement employees during a strike or lockout.
How is the Work Opportunity Tax Credit calculated?
The Work Opportunity Tax Credit is calculated as 40% of first-year eligible wages, up to a maximum of $6,000 per employee. If the employee completed at least 120 hours but less than 400 hours of service for the employer, the Work Opportunity Tax Credit is up to 25% of first-year eligible wages. A different maximum credit calculation may apply in the case of qualified veterans and qualified summer youth employees.
Which wages do not qualify for the WOTC?
Wages that do not qualify for the Work Opportunity Tax Credit include:
- Wages paid for federally funded on-the-job training
- Wages paid to an individual who performed the same or substantially similar services as employees participating in or affected by a strike or lockout at the employer’s plant
WOTC wages are reduced by any supplementation payments made to the employer for an employee under Social Security Act §482(e). Additional limitations may apply when calculating the credit.
How do employers claim the Work Opportunity Tax Credit?
Employers may claim the Work Opportunity Tax Credit on Form 5884 if they are for-profit. The credit is elective — employers are not required to claim the Work Opportunity Tax Credit even if they’re eligible to do so.
How do tax-exempt employers claim the WOTC?
Tax-exempt employers claim a Work Opportunity Tax Credit using Form 5884-C when hiring qualified veterans. However, tax-exempt employers are generally not eligible for the WOTC.
Work Opportunity Tax Credit is allowed against the Old Age, Survivors, and Disability Insurance (OASDI) program — often referred to as the Social Security tax owed by the tax-exempt employer. The credit is calculated in the same way it would be if the employer were not tax-exempt, with a few modifications:
- 26% — instead of 40% — for qualifying first-year wages
- 16% — instead of 25% — for a qualified veteran who has completed at least 120 hours but less than 400 hours of service for the employer
The tax-exempt employer can only consider wages paid to a qualified veteran for services related to the employer’s exempt purposes.
This information was last updated on 01/05/2024.
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