How Small Businesses Can Claim the Work Opportunity Tax Credit (WOTC)

There are many tax credits that businesses can take advantage of for a variety of reasons. Understanding these credits—and how to properly claim them—can save businesses hundreds or even thousands of dollars each year. One of the most beneficial credits for small businesses is the Work Opportunity Tax Credit (WOTC).

What Is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to businesses that hire new employees who belong to certain targeted groups that face barriers to employment. The program, introduced in 1996, has been extended multiple times.

The goal of WOTC is to encourage workplace diversity and provide incentives to companies that offer employment opportunities to individuals who have historically found it difficult to get hired. Most businesses can claim the credit in the first year the employee is hired.

What Are the Targeted Groups?

To qualify for the WOTC, a business must hire an employee who is certified as a member of one of these targeted groups:

• Veterans (including disabled veterans and those unemployed for a specified period)

• Formerly incarcerated individuals or those previously convicted of a felony

• Recipients of state assistance under the Social Security Act (e.g., TANF)

• Individuals living in empowerment zones or rural renewal counties

• Referred individuals from a vocational rehabilitation program

• Families receiving SNAP benefits (Supplemental Nutrition Assistance Program)

• Recipients of Supplemental Security Income (SSI) under the Social Security Act

• Long-term unemployed individuals (unemployed for 27 weeks or longer)

Each group has specific eligibility rules that must be met, so employers need to verify the new hire’s status during onboarding.

How Much Are the WOTC Tax Credits Worth?

All taxable and some tax-exempt businesses may qualify for the WOTC. The exact amount depends on the employee’s targeted group, hours worked, and wages earned in the first year of employment:

• 25% of first-year wages if the employee works 120–399 hours.

• 40% of first-year wages if the employee works 400 hours or more.

Example 1: John, who was long-term unemployed, works 200 hours and earns $5,000 in his first year. The business can claim a tax credit of $5,000 × 0.25 = $1,250.

Example 2: Bill, a veteran, works 1,000 hours and earns $20,000 in his first year. The business can claim a tax credit of $20,000 × 0.40 = $8,000.

The Timeline and Steps to Claim the WOTC

To successfully claim the Work Opportunity Tax Credit, employers must follow a specific hiring-to-filing timeline. Missing these steps or deadlines could result in losing the credit.

Step 1: Pre-Screen New Hires

• Before or on the day you offer employment, ask the candidate to fill out IRS Form 8850 (Pre-Screening Notice and Certification Request).

• This form determines if the individual might qualify as a member of a targeted group.

Step 2: Submit Forms Within 28 Days

• Employers must submit Form 8850 to their state workforce agency (SWA) within 28 calendar days of the employee’s start date. In Maine, this is administered by Maine Department of Labor. 

• Along with Form 8850, submit ETA Form 9061 (Individual Characteristics Form) or ETA Form 9062 (Conditional Certification if applicable).

Step 3: Await Certification

• The SWA will review the application and determine if the employee qualifies.

• You will receive either a certification or a denial letter. This step is crucial because you cannot claim WOTC without certification.

Step 4: Track Employee Hours and Wages

• Keep accurate records of hours worked and first-year wages.

• Employees must work at least 120 hours before you can claim the credit.

Step 5: Claim the Credit on Your Business Tax Return

• When filing your business taxes, use IRS Form 5884 (Work Opportunity Credit) to calculate and claim the credit.

• For partnerships, S corporations, and tax-exempt organizations, additional forms such as IRS Form 3800 (General Business Credit) may apply.

Best Practices for Small Businesses

• Integrate WOTC Screening into Onboarding: Add the WOTC questionnaire to your hiring packet to ensure you never miss the 28-day deadline.

• Use a Payroll Provider or Tax Professional: WOTC calculations can be complex, especially when coordinating with state agencies. Many payroll companies (like Paper Trails) can manage this process for you.

• Track Credits Annually: WOTC credits can add up significantly if you hire multiple qualifying employees each year.

Why WOTC Matters for Small Businesses

For small business owners, tax credits like WOTC can make a real financial impact. Not only can you save thousands of dollars on federal taxes, but you also contribute to workforce development by offering jobs to individuals who face employment barriers.