What a Work Opportunity Tax Credit is and who uses it

A Work Opportunity Tax Credit (WOTC) is a federal tax credit that reduces what an employer owes in income taxes when they hire someone from a group the government wants to see employed. The employer claims the credit on their business tax return, not the employee. The credit is worth between $1,200 and $9,600 per new hire, depending on which group the person belongs to and how long they stay employed.

This is an employer-side benefit, not a worker benefit. If you are an employee, you do not claim this credit yourself. Your employer decides whether to pursue it, and they handle all the paperwork with the IRS. You may never know the credit exists or that your employer claimed it.

The program has been in place since 1996 and targets nine specific groups: people receiving Supplemental Nutrition information Program (SNAP) benefits, recipients of Temporary information for Needy Families (TANF), ex-felons hired within one year of release or conviction, veterans with service-connected disabilities, long-term unemployed individuals, recipients of Supplemental Security Income (SSI), vocational rehabilitation referrals, summer youth employees, and long-term family information recipients.

Key Takeaways

  • Work Opportunity Tax Credits are claimed by employers on their business tax returns, not by employees on personal returns.
  • The credit ranges from $1,200 to $9,600 per hire and depends on which targeted group the employee belongs to and how long they work.
  • Nine specific groups are covered, including people receiving SNAP, TANF, veterans with disabilities, and individuals with criminal records.
  • Employers must obtain IRS Form 8850 and a state-issued Individual Identification Number (ATIN or SSN) before claiming the credit.
  • The employee must work at least 120 hours in the first year for the employer to claim any credit at all.

The nine targeted groups that may have access to

The IRS recognizes nine groups for WOTC purposes. Each group has its own may be able to access rules and credit amounts. An employer hires someone and then determines which group (if any) the person fits into before filing the claim.

SNAP recipients must have received benefits for at least three months in the past 12 months. TANF recipients must have received information for at least 18 of the past 24 months or must be a member of a family that received TANF for at least 18 of the past 24 months. Ex-felons must have been convicted of a felony and hired within one year of conviction or release from prison. Veterans with service-connected disabilities must have a disability rating from the Department of Veterans Affairs and have been unemployed for at least four weeks in the past 12 months. Long-term unemployed individuals must have been unemployed for at least 27 weeks in the past 12 months and received unemployment benefits for at least four weeks in that same period.

SSI recipients must be receiving Supplemental Security Income at the time of hire. Vocational rehabilitation referrals are people referred by a state vocational rehabilitation agency and must have a disability that creates a substantial barrier to employment. Summer youth employees must be between 16 and 17 years old, hired between May 1 and September 15, and live in an empowerment zone or enterprise community. Long-term family information recipients must be members of a family that received TANF for at least 18 of the past 24 months and must be hired within two years of the family's TANF benefits ending.

How much credit an employer can claim

The credit amount depends on two things: which group the employee belongs to and how long they work for the employer in the first year. The IRS sets a minimum work requirement and then calculates the credit based on wages paid.

For most groups, the employee must work at least 120 hours in the first year for the employer to claim any credit. For long-term unemployed individuals and certain other groups, the threshold is 400 hours. If the employee works fewer hours than the minimum, the employer receives no credit.

Once the minimum is met, the credit is calculated as a percentage of the wages paid in the first year of employment. For most groups, the credit is 25 percent of wages paid if the employee works at least 120 hours but fewer than 400 hours, and 40 percent of wages paid if the employee works 400 hours or more. Some groups have different percentages. The maximum credit per employee varies by group but ranges from $1,200 to $9,600.

What employers must do to claim the credit

An employer cannot straightforward hire someone from a targeted group and automatically receive a credit. They must follow specific steps and file forms with the IRS and their state.

First, the employer must obtain IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) from the employee. This form asks the employee to certify which targeted group they belong to. The employer must give the employee this form within 21 days of the hire date. The employee fills it out and signs it, confirming their status.

Second, the employer must submit Form 8850 to the state workforce agency (usually the state labor department or workforce development office) within 21 days of the hire date. The state agency then verifies whether the employee actually belongs to the group claimed. This verification step is required before the employer can claim the credit on their tax return.

Third, the employer must keep records of wages paid, hours worked, and the dates of employment for the first year. When they file their business tax return, they claim the credit on Form 5884 (Work Opportunity Credit) or Form 8884 (Renewable Electricity, Refined Coal, and Indian Coal Production Credit) depending on the type of business and the group involved. Most employers use Form 5884.

Common mistakes employers make when claiming WOTC

Employers often miss the 21-day window to give Form 8850 to the employee or to submit it to the state. If the form is not submitted within 21 days of hire, the credit is lost entirely. There is no extension or late-filing option. An employer who hires someone on January 15 must have the form to the state by February 5 or forfeit the credit.

Another common error is misidentifying which group the employee belongs to. An employer might assume someone qualifies for one group when they actually may have access to for another, or they might claim a credit for someone who does not belong to any targeted group at all. The state verification process catches some of these errors, but the employer is responsible for accuracy on the initial claim.

Employers also sometimes fail to track hours and wages correctly. If an employee works 115 hours instead of 120, the credit disappears. If wages are recorded incorrectly, the credit amount will be wrong. Payroll records must be clear and complete.

Finally, some employers do not realize that the credit applies only to the first year of employment with that employer. If the same person is hired again later, they do not may have access to for a second credit. The credit is one-time per employee per employer.

How this credit affects employees

Employees do not pay taxes on the credit and do not report it on their personal tax returns. The credit is a reduction in the employer's tax liability, not the employee's. An employee's wages, tax withholding, and take-home pay are not affected by whether the employer claims the credit.

However, the existence of the credit may influence hiring decisions. An employer who knows they can claim a $2,400 credit for hiring someone from a targeted group may be more willing to hire that person, especially if the employer has concerns about the candidate's work history or background. In that sense, the credit can indirectly benefit workers in targeted groups by making them more attractive to hire.

Employees should be aware that employers may ask them to complete Form 8850 as part of the hiring process. This form asks for personal information and certification of status in a targeted group. Employees are not required to complete it, but if they do not, the employer cannot claim the credit. Some employers make the form part of the standard onboarding paperwork.

State-level variations and additional credits

While the federal WOTC is uniform across all states, some states offer their own additional credits for hiring from targeted groups. These state credits work separately from the federal credit and are claimed on state tax returns. An employer might claim both the federal WOTC and a state credit for the same hire.

State credits vary widely in amount, may be able to access rules, and filing requirements. Some states tie their credits to the federal program and use the same targeted groups. Others define their own groups or offer credits for hiring in specific geographic areas or industries. An employer should check with their state tax authority or a tax professional to learn whether a state credit is available for a particular hire.

Frequently Asked Questions

Do I have to tell my employer I belong to a targeted group?

No. Completing Form 8850 is voluntary. Your employer cannot require you to complete it as a condition of employment. However, if you do not complete it, your employer cannot claim the credit. Some employers may encourage you to complete it because it benefits them, but the choice is yours.

Will claiming this credit affect my benefits like SNAP or TANF?

No. The credit is claimed by your employer on their business tax return and does not appear on your personal tax return or income records. It should not affect your benefits. However, your employment itself may affect your benefits, depending on your income and the rules of the program you are in. Contact your benefits administrator if you have questions about how new employment affects your specific benefits.

Can an employer claim the credit if I work part-time?

Yes, if you work enough hours. You must work at least 120 hours in the first year for most groups, or 400 hours for certain groups like long-term unemployed individuals. Part-time work counts toward this total as long as the hours add up. If you work 30 hours per week for 4 weeks, that is 120 hours and meets the minimum.

What happens if I leave the job before the year is over?

The credit is based on the hours you actually worked and the wages you actually earned, even if you leave before 12 months pass. If you work 150 hours and earn $2,000 before leaving, your employer calculates the credit based on those numbers. If you leave before reaching the 120-hour minimum, your employer receives no credit.

Can an employer claim this credit for the same person twice?

No. The credit is one-time per employee per employer. If you are hired, work, and leave, and then are hired again by the same employer years later, the employer cannot claim the credit for the second hire. The credit applies only to the first employment relationship between that employee and that employer.