Can I claim the Work Opportunity Tax Credit?

by | Jun 27, 2025 | Business Taxes, Credits & Incentives

Here’s what HIVE AI had to say about “Can I claim the Work Opportunity Tax Credit?”:

Yes, you may be eligible to claim the Work Opportunity Tax Credit (WOTC), but eligibility depends on several specific requirements related to your business type, the employees you hire, and proper certification procedures.

Basic Eligibility Requirements

Employers, including certain tax-exempt employers, may be eligible for the work opportunity tax credit if they hire individuals who face employment barriers. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit This is a one-time credit for each new hire. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit The credit is designed to incentive employers to hire from specific targeted groups that historically face significant barriers to employment.

Credit Amount and Structure

For purposes of section 38, the amount of the work opportunity credit determined under this section for the taxable year shall be equal to 40 percent of the qualified first-year wages for such year. IRC § 51(a) However, the credit percentage varies based on the number of hours worked by the employee:

Qualified first-year wages of employees who worked for you at least 120 hours but fewer than 400 hours receive a 25% credit rate, while qualified first-year wages of employees who worked for you at least 400 hours receive a 40% credit rate. IRS – Publication 5035: Statistics of Income – Partnership Returns Line Item Estimates IRS – Publication 5035: Statistics of Income – Partnership Returns Line Item Estimates IRS – Publication 5035: Statistics of Income – Partnership Returns Line Item Estimates The amount of qualified wages taken into account for a qualified employee is generally limited to $6,000 or $3,000 for a qualified summer youth employee. IRS IRM 21.7.4 Income Taxes/Information Returns

For certain long-term family assistance recipients, there’s an enhanced benefit structure. With respect to the employment of a long-term family assistance recipient, the amount of the work opportunity credit determined under this section for the taxable year shall include 50 percent of the qualified second-year wages for such year, and the amount of the qualified first-year wages, and the amount of qualified second-year wages, which may be taken into account with respect to such a recipient shall not exceed $10,000 per year. IRC § 51(e)

Targeted Groups Eligible for the Credit

The targeted groups include: Qualified IV-A Recipient, Qualified Veteran, Ex-Felon, Designated Community Resident (DCR), Vocational Rehabilitation Referral, Summer Youth Employee, Supplemental Nutrition Assistance Program (SNAP) Recipient, Supplemental Security Income (SSI) Recipient, Long-Term Family Assistance Recipient, and Qualified Long-Term Unemployment Recipient. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit

Current Extension and Timeline

Section 113 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, P.L. 116-260, extends the work opportunity tax credit for qualified individuals who begin work after December 31, 2021 and before December 31, 2025. IRS IRM 21.7.4 Income Taxes/Information Returns The Work Opportunity Tax Credit (WOTC) was extended through December 31, 2025, for all targeted groups by section 113, Division EE, subtitle B of Pub. L. 116-260. IRS IRM 21.7.4 Income Taxes/Information Returns

Critical Certification Requirements

The most important aspect of claiming the WOTC is obtaining proper certification before or shortly after hiring. To claim the credit, employers must file Form 8850, Pre-Screening Notice and Certification Request for the credit with their state workforce agency. Before an employer may claim the credit, the employer must obtain certification that an individual is a member of a targeted group. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit

To claim the credit, taxpayers must request and be issued a certification for each employee from the state workforce agency (SWA) to prove that the employee is a member of a targeted group. Taxpayers must receive the certification by the day the individual begins work, or they must complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, on or before the day the taxpayer offers the individual a job. Employers use Form 8850 to pre-screen and to make a written request to the SWA of the state in which their business is located (where the member of the targeted group works), to certify an individual as a member of a targeted group for purposes of qualifying for the work opportunity credit, no later than the 28th calendar day after the date the member of a targeted group begins working for the taxpayer. IRS IRM 21.7.4 Income Taxes/Information Returns

Pursuant to § 51(d)(13)(A) of the Code, an individual is not treated as a member of a targeted group unless (1) on or before the day the individual begins work, the employer obtains certification from the designated local agency (DLA) that the individual is a member of a targeted group; or (2) the employer completes a pre-screening notice on or before the day the individual is offered employment and submits such notice to the DLA to request certification not later than 28 days after the individual begins work. To request certification from a DLA, an employer submits IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to the DLA no later than the 28th day after the day an individual who is a member of a targeted group begins work for the employer.

Filing Requirements and Forms

Partnerships, S corporations, cooperatives, estates, and trusts must file this form to claim the credit. All other taxpayers aren’t required to complete or file this form if their only source for this credit is a partnership, S corporation, cooperative, estate, or trust. Instead, they can report this credit directly on Form 3800, General Business Credit. IRS – Instruction 5884: Instructions for Form 5884, Work Opportunity Credit

Only certain organizations claim the credit on Form 5884 (i.e., partnerships, S corporations, cooperatives, estates, and trusts). All other taxpayers are generally not required to complete or file this form if their only source for this credit is a partnership, S corporation, estate, or trust. IRS IRM 21.7.4 Income Taxes/Information Returns

Special Considerations for Tax-Exempt Organizations

No credit shall be allowed under section 38 for any work opportunity credit determined under this subpart to any organization (other than a cooperative described in section 521) which is exempt from income tax under this chapter. IRC § 52(c) However, there’s an important exception for qualified veterans: For credit against payroll taxes for employment of qualified veterans by qualified tax-exempt organizations, see section 3111(e). IRC § 52(c)

A taxable business may apply the credit against its business income tax liability and tax-exempt employers can claim the credit against payroll taxes. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit Certain tax-exempt organizations can use Form 5884-C to claim the work opportunity credit for certain wages paid to qualified veterans. IRS – Instruction 5884: Instructions for Form 5884, Work Opportunity Credit

Eligibility for the credit claimed on Form 5884-C is limited to qualified tax-exempt organizations (organizations described in IRC 501(c) and exempt from tax under IRC 501(a)). IRS IRM 21.7.2 Employment and Railroad Tax Returns

Important Limitations and Restrictions

Employers cannot claim the WOTC for employees who are rehired. IRS – Publication 5642: Which employers are eligible for the work opportunity tax credit Additionally, Your business doesn’t have to be located in an empowerment zone or rural renewal county to qualify for this credit. IRS – Instruction 5884: Instructions for Form 5884, Work Opportunity Credit

There’s also coordination with other credits to prevent double-dipping. The term “qualified zone wages” shall not include wages taken into account in determining the credit under section 51. IRC § 1396(c)

Election to Opt Out

Interestingly, employers have the flexibility to elect not to claim the credit. A taxpayer may elect to have this section not apply for any taxable year. An election under paragraph (1) for any taxable year may be made (or revoked) at any time before the expiration of the 3-year period beginning on the last date prescribed by law for filing the return for such taxable year (determined without regard to extensions). IRC § 51(j) You can claim or elect not to claim the work opportunity credit any time within 3 years from the due date of your return on either your original return or an amended return. IRS – Instruction 5884: Instructions for Form 5884, Work Opportunity Credit

Professional Employer Organizations (PEOs)

If you use a Professional Employer Organization, the credit treatment has specific allocation rules. For purposes of the credits specified in paragraph (e)(2) of this section, the credit with respect to a work site employee performing services for a customer applies to the customer, not to the CPEO; and in computing the credit, the customer, and not the CPEO, is to take into account wages and federal employment taxes paid by the CPEO with respect to the work site employee and for which the CPEO receives payment from the customer. Tresuary Reg. Treasury Regulation 31.3511-1 A credit is specified in this paragraph (e) if such credit is allowed under Section 51 (work opportunity credit). Tresuary Reg. Treasury Regulation 31.3511-1

Practical Steps to Claim the Credit

To successfully claim the WOTC, you should:

  1. Pre-screen potential employees using Form 8850 before or on the day you make a job offer
  2. Submit Form 8850 to your state workforce agency within 28 days of the employee starting work
  3. Obtain certification from the state workforce agency that the employee is a member of a targeted group
  4. Maintain proper records of wages paid and hours worked
  5. File the appropriate tax forms (Form 5884 for certain entities, or report directly on Form 3800)

The Work Opportunity Tax Credit can provide significant tax savings for employers who hire from targeted groups, but the certification requirements are strict and must be followed precisely. The 28-day deadline for submitting Form 8850 is particularly critical, as missing this deadline will generally disqualify you from claiming the credit for that employee. Given the complexity of the requirements and the potential for significant tax savings, it’s advisable to work with a tax professional to ensure proper compliance with all WOTC requirements.

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