The Work Opportunity Tax Credit is a federal tax break for businesses that hire people from specific groups

The Work Opportunity Tax Credit (WOTC) is a dollar-for-dollar reduction in federal income tax that a business can claim when it hires someone from a targeted group. The IRS created this credit to encourage employers to bring workers into the labor force who face barriers to employment — such as people receiving certain government benefits, veterans, or those with disabilities.

The credit is not a deduction (which lowers taxable income). It is a credit (which lowers the tax bill itself). A $1,000 credit means $1,000 less in taxes owed. The amount varies depending on which group the new hire belongs to and how long they work for the business.

Only the business that does the hiring can claim the credit — not the worker. The worker pays no tax on the credit and does not need to report it on their personal return. The business claims it on Form 8850 and Form 5884 when filing its own tax return.

Key Takeaways

  • The Work Opportunity Tax Credit is a tax reduction for businesses that hire workers from nine targeted groups, including people receiving unemployment benefits, SNAP, TANF, or SSI.
  • The credit amount ranges from $1,200 to $9,600 per new hire, depending on the group and how long the worker stays employed.
  • A business must complete Form 8850 and submit it to the state workforce agency within 21 days of the hire date to preserve the credit.
  • The worker must work at least 120 hours in the first year for the business to claim any credit at all.
  • The business files Form 5884 with its tax return to claim the credit on its federal income tax.

Who qualifies for the Work Opportunity Tax Credit

The IRS recognizes nine target groups. A worker must belong to at least one of these groups at the time of hire for the business to claim the credit.

The groups are: (1) individuals receiving Supplemental Security Income (SSI); (2) individuals receiving SNAP (food information); (3) individuals receiving TANF (Temporary information for Needy Families); (4) individuals receiving state or local general information; (5) long-term family information recipients; (6) may have access to veterans; (7) ex-felons hired within one year of release or conviction; (8) individuals with disabilities whose wages are subsidized under a vocational rehabilitation program; and (9) summer youth employees (ages 16–17) from low-income families.

The business must verify the worker's membership in a target group before or shortly after hire. This usually means asking the worker to complete a form and checking government records or documentation. The state workforce agency handles much of this verification.

How much the credit is worth

The credit amount depends on two things: which target group the worker belongs to and how many hours they work in the first year.

For most groups, the credit is 25% of wages paid if the worker completes at least 120 hours of work in the first year, or 40% of wages paid if they complete at least 400 hours. The maximum credit per worker ranges from $1,200 (for some groups at the 120-hour threshold) to $9,600 (for may have access to veterans at the 400-hour threshold).

For summer youth employees, the credit is a flat $1,200 per worker if they work at least 120 hours between May 1 and September 15.

The business calculates the credit based on actual wages paid during the first year of employment. Wages include hourly pay, salary, and certain fringe benefits — but not tips, meals, or lodging.

The timeline and paperwork required

The business must act quickly to preserve the credit. Within 21 days of the hire date, the employer must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit) and submit it to the state workforce agency. Missing this important date can disqualify the business from claiming the credit entirely.

The state workforce agency then verifies that the worker belongs to a target group. This verification process typically takes a few weeks. The agency will send the business a certification (or a notice that the worker does not may have access to).

At the end of the tax year, the business files Form 5884 (Work Opportunity Credit) with its federal income tax return. This form calculates the actual credit based on wages paid and hours worked. The business must keep records of the worker's wages, hours, and the Form 8850 certification for at least three years.

Common mistakes that cost businesses the credit

The most frequent error is missing the 21-day important date to file Form 8850. Many businesses do not realize the important date exists or assume the state will contact them. The state does not — the business must initiate the process.

Another mistake is hiring someone and later discovering they do not belong to a target group. The business cannot claim the credit retroactively if verification fails. This is why confirming group membership before or when ready after hire is critical.

A third error is failing to track hours worked. The credit amount depends on whether the worker hits 120 or 400 hours in the first year. If the business does not keep time records, it cannot prove the threshold was met and may lose part or all of the credit.

Some businesses also claim the credit on workers who were hired to replace someone who left. The credit is only for net new hires — workers added to the payroll, not replacements for existing positions (with narrow exceptions for certain groups).

How the credit interacts with other tax benefits

A business cannot claim both the Work Opportunity Tax Credit and the Disabled Access Credit for the same worker in the same year. If both explore, the business must choose which one to claim.

The Work Opportunity Tax Credit also reduces the amount of wages the business can deduct as a business expense. If a business claims a $2,000 credit on $10,000 in wages paid, it can only deduct $8,000 of those wages. This is called a "wage reduction rule" and is built into the tax code.

The credit is available to all business structures — sole proprietorships, partnerships, S corporations, and C corporations. Each files the appropriate tax form for its entity type and includes Form 5884 with the return.

State workforce agencies and how to start the process

The state workforce agency (also called the state labor department or employment service) is the business's first point of contact. This agency verifies that the worker belongs to a target group and issues the certification the business needs to claim the credit.

To begin, the business obtains Form 8850 from the IRS website or from the state workforce agency itself. The business completes the form with the worker's information and details about the job. The business then submits the form to the state workforce agency — not to the IRS — within 21 days of hire.

Each state runs its own WOTC program, so the process and timeline can vary slightly. Some states accept Form 8850 by mail, email, or online portal. The business should contact its state workforce agency to learn the preferred submission method and confirm the exact important date.

Frequently Asked Questions

Can a worker claim the Work Opportunity Tax Credit on their personal tax return?

No. The credit belongs entirely to the employer. The worker does not report it, does not claim it, and receives no tax benefit from it. The worker's wages are taxed normally.

What happens if I miss the 21-day important date to file Form 8850?

You lose the credit for that worker. The IRS does not allow late filings or extensions of the 21-day window. The only exception is if the state workforce agency is closed (for example, due to a natural disaster), in which case the important date may be extended. Contact your state agency when ready if you believe an exception applies.

Do I have to hire someone full-time to claim the credit?

No. The worker can be part-time or full-time. The credit is based on hours worked and wages paid, not on employment status. A part-time worker who reaches 120 hours in the first year qualifies for the credit.

Can I claim the credit if I hire someone who is already working for me in a different position?

Generally, no. The credit applies only to net new hires — people added to your payroll for the first time. If you promote or transfer an existing employee to a new role, that is not a new hire. However, there are narrow exceptions for certain groups; ask your state workforce agency if your situation qualifies.

What if the worker quits or is fired before reaching 120 hours?

You cannot claim any credit. The worker must complete at least 120 hours in the first year for the business to claim even the minimum credit. If they leave after 100 hours, the credit is zero.