Key takeaways
- Get tax credits for hiring people from underrepresented groups.
- Claim up to 40% of first-year wages paid and a maximum tax credit of up to $2,400 per employee.
- Hire as many eligible employees as you want. There is no cap on total credits.
- Bench offers year-round support to find and claim credits, plus handles income tax filings.
What is the Work Opportunity Tax Credit?
The WOTC is a federal tax credit available to provide tax relief to business owners who employ individuals from certain “targeted groups” who traditionally have a harder time getting hired, like veterans or ex-felons.
Managed by the IRS and the Department of Labor, the WOTC promotes workplace diversity and lets you save on taxes. It’s a smart way to bring in new talent and invest more in developing your business—a win-win!
The Consolidated Appropriations Act extended this credit until December 31, 2025, so businesses can continue to claim it for eligible employees who are hired before the end of that year. Created in 1996, the WOTC has been renewed many times through various laws, including this act.
Who qualifies for the Work Opportunity Tax Credit?
If you want to participate in the WOTC program, you'll need to hire someone from one of the groups that the IRS says qualifies. They include:
Eligible employees
- Temporary Assistance for Needy Families (TANF) recipients
- Qualified veterans
- Qualified ex-felons
- Designated community residents living in empowerment zones or rural renewal counties
- Vocational rehabilitation referrals
- Summer youth employees
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Long-term unemployment recipients
Non-eligible employees
Just a heads up, there are exceptions to the list of targeted groups that qualify for the WOTC, like:
- Former employee
- A family member or dependent
- Someone who’ll own more than 50% of your business
- An employee who doesn’t work at least 120 hours on the job
Eligible employers
Your business, no matter how big or small, can qualify for a tax credit with the WOTC program. And since there’s no limit on how many people you can hire under it, there’s also no cap on the total credits you can earn.
How much is the Work Opportunity Tax Credit worth?
The WOTC typically equals 40% of up to $6,000 in wages paid to a qualifying employee in their first year working at your business. As a result, the maximum tax credit you can claim per eligible employee is $2,400 ($6,000 x 0.40 = $2,400).
Let’s look at an example. Suppose you hire John, who has been unemployed for a while and just started a new job with you.
If John works between 120 and 399 hours, you can claim 25% of his first-year wages, up to $6,000. For instance, if he earns $6,000, you could receive a credit of $1,500.
Now, if John works 400 hours or more, you can claim 40% of first-year wages, still capped at $6,000. In this case, if he earns $6,000, you’d receive a tax credit of $2,400. The credit can reach up to $24,000 for other categories, such as veterans.
A new hire like John, who works at least 400 hours, could help you considerably reduce your tax bill while adding valuable talent to your team.
Is the Work Opportunity Tax Credit right for you?
The WOTC offers real benefits, but it’s important to weigh both the pros and cons before deciding if it’s worth applying. Here’s a quick rundown of the pros and cons:
Pros
- The credit helps reduce what you owe in taxes.
- Hiring through the WOTC encourages a more inclusive workplace.
Cons
- The WOTC is non-refundable. If the credit is higher than your income tax bill, there’s no refund for the extra amount.
- There’s a bit of extra paperwork involved. You’ll need to track hours worked and file specific forms to certify each employee’s eligibility.
How to claim the Work Opportunity Tax Credit
Ready to claim the WOTC? Here’s a guide to help you make sure you don’t miss any steps or deadlines:
Step 1: Identify qualified applicants
Your State Workforce Agency (SWA) or local unemployment office can provide a list of eligible job seekers. This is a good first step to see if your new hire qualifies for the tax credit.
Step 2: Screen your applicant
Once you find someone you want to hire, have them fill out the questionnaire on page one of Form 8850 (Pre-Screening Notice and Certification Request). This should be done on or before the job offer date. This form helps confirm if they fall into one of the WOTC targeted groups.
Step 3: Complete and submit the required forms
Within 28 days of your new hire’s start date, submit Form 8850 along with either ETA Form 9061 (for new hires without prior certification) or ETA Form 9062 (for applicants with a conditional certification from an agency like Job Corps) to your SWA.
Step 4: Track hours and wages
Stay on top of the hours worked by your WOTC-certified employee. For most of the groups, an individual must work at least 120 hours in their first year for you to claim the credit. If the hire is in the TANF recipient category, they must work 400 hours.
Step 5: Apply for the tax credit
When you file your annual tax return, use IRS Form 5884 (Work Opportunity Credit) to claim the WOTC.
Step 6: Maintain good records
It’s always a great idea to make copies of all submitted forms and documents and carefully track hours worked and wages. In case of an audit, keeping these records on hand will make it easier to support your claims.
Let Bench help you lighten your tax load with the Work Opportunity Tax Credit and other credits
You’ve got enough on your plate—why not let tax credits help you keep more of what you earn? The Work Opportunity Tax Credit is just one of the many ways to pay less tax, but it’s easy to miss out on the many U.S. small business tax credits if you’re already busy with other responsibilities.
Our tax advisors are available year-round to help small businesses like yours uncover every credit and deduction out there. We’ll help you optimize your tax situation, find those savings, and even handle all the tax filing so you don’t have to worry about it.
