The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from certain targeted groups that have faced barriers to employment. The IRS explains it on its Work Opportunity Tax Credit page. The credit can be meaningful, but it is easy to lose through missed deadlines.

Target groups

Eligible new hires include, among others, certain veterans, recipients of specified public assistance, ex-felons, designated community residents, vocational rehabilitation referrals, summer youth employees in designated areas, long-term unemployed individuals and others listed by the IRS. The employee's eligibility must be certified by the state workforce agency.

The 28-day deadline

This is the step most employers miss. To claim the credit, the employer must submit Form 8850, Pre-Screening Notice and Certification Request, to the state workforce agency no later than the 28th day after the employee begins work, along with the Department of Labor's ETA Form 9061 or 9062. The applicant completes part of Form 8850 on or before the day a job offer is made.

Certification

The state workforce agency reviews the request and issues a certification or denial. The employer keeps the certification; it is not sent to the IRS with the return.

Minimum hours and wages

The credit depends on the target group and on hours worked. Employees must generally work at least 120 hours in the first year for any credit, with a larger credit for those who work 400 hours or more. The credit is a percentage of qualified first-year wages, up to limits that vary by target group.

Claiming the credit

Employers claim the credit on Form 5884, Work Opportunity Credit, as part of the general business credit on the income tax return. The employer's deduction for wages is reduced by the amount of the credit. Qualified tax-exempt organizations can claim a credit against payroll taxes for certain veterans using Form 5884-C.

Making it routine

  1. Include Form 8850 in the new hire paperwork for every applicant who receives an offer
  2. Send forms to the state agency within days of the start date, not weeks
  3. Track certifications and hours for each eligible employee
  4. Provide the totals to your preparer at year end

Availability

The credit has been extended by Congress several times and has a scheduled expiration date. Check the IRS page for the current period during which hires qualify.

Our payroll services can include Form 8850 in onboarding and track hours for certified employees.

Building WOTC into hiring

Include the screening form in your new hire packet so it is completed on or before the day of the job offer, and assign one person to submit forms within the deadline. Missing the deadline generally means losing the credit for that employee.

Recording the credit

The credit reduces income tax, not payroll tax, for most businesses. Keep the certification letters from the state workforce agency and the wage records supporting the credit with your tax files.

Review the credit's expiration status each year.

Retain documents with your tax records.

Key terms

Definitions for terms used in this guide, from our small business glossary: