The Work Opportunity Tax Credit offers a substantial tax savings for businesses
The Work Opportunity Tax Credit (WOTC) offers employers a credit for hiring eligible employees. The most common targeted groups include the following:
Qualified long-term unemployment recipients
Long-term family assistance recipients
Vocational rehabilitation referrals
Qualified SSI recipients
Eligible employees must be certified as a member of a targeted group by the applicable State Workforce Agency (SWA). You can obtain the certification by the day the employee begins work or complete a pre-screening notice using IRS Form 8850, and then submit Form 8850 to the SWA within 28 days after the employee begins working.
The credit is generally equal to 40 percent of qualified first-year wages paid to an eligible employee, up to a maximum credit of $2,400. The credit is based on a maximum wage amount of $6,000. However, there are exceptions to the general rule which can provide a larger wage limit and credit.
The wage limit is $12,000 for first-year wages paid to a qualified veteran who is entitled to compensation for a service-connected disability and was discharged from the military within the past year.
The limit is even higher for wages paid to a qualified veteran who was unemployed for at least six months in the prior year. The wage limit is $14,000 with a maximum credit of $5,600.
A qualified veteran with a service-connected disability and who was unemployed for at least six months in the prior year has a wage limit of $24,000 and a maximum credit of $9,600.
A long-term family assistance recipient qualifies for a maximum wage limit of $10,000 and $4,000 credit. The WOTC can be claimed for 50 percent of qualified second-year wages. The credit would be for $5,000 (50 percent of $10,000). The maximum combined credit for the two years would be $9,000 ($4,000 + $5,000).
Claiming the WOTC reduces your business income tax for the related wages. The credit is calculated and claimed on IRS Form 5884 (Work Opportunity Credit).
You can carry any unused WOTC amount back one year. The credit can also be carried forward for 20 years. If there is still an unused credit after 20 years, you can usually deduct the unused credit in the 21st year.
You can’t claim wages that were used for the COVID-19-related employee retention tax credit for the WOTC. The IRS does not allow two different types of credits for the same wages. The credit is not allowed for an employee who is related to you.
The WOTC is currently available through 2025 and can provide a substantial tax savings for businesses that hire individuals that qualify for the credit.
David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at firstname.lastname@example.org