How Work Opportunity Tax Credits Help Employers Hire From Targeted Groups

What the Work Opportunity Tax Credit Does

The Work Opportunity Tax Credit (WOTC) is a federal tax credit that reduces what an employer owes in income taxes when they hire someone from a group the government wants to encourage into the workforce. The employer claims the credit on their business tax return, not the employee. The credit is worth between $1,200 and $9,600 per new hire, depending on which targeted group the person belongs to and how long they stay employed.

This is different from a deduction or a subsidy. The employer doesn't receive money; instead, they pay less in taxes. The credit only exists if the person is hired and works. It's designed to offset the cost of hiring and training someone who might otherwise face barriers to employment.

Key Takeaways

The WOTC reduces an employer's federal income tax bill when they hire from nine specific groups, including people receiving certain benefits, ex-offenders, and long-term unemployed workers.
The employer must obtain a certification from the state workforce agency before or shortly after hiring to claim the credit.
The credit ranges from $1,200 to $9,600 per employee depending on the target group and length of employment.
The employee does not report anything on their personal tax return; the credit belongs entirely to the employer.

The Nine Target Groups That may have access to

The IRS defines nine categories of workers for whom employers can claim the credit. These are: recipients of Supplemental Nutrition information Program (SNAP) benefits; recipients of Temporary information for Needy Families (TANF); recipients of Supplemental Security Income (SSI); long-term family information recipients; vocational rehabilitation referrals; ex-felons hired within one year of conviction or release from prison; designated community residents (living in an empowerment zone or renewal community); veterans receiving unemployment benefits; and long-term unemployed individuals receiving unemployment benefits.

Not every person in these groups automatically qualifies. For example, an ex-felon must have been convicted or released within the past year. A SNAP recipient must have received benefits for at least three months during the past 12 months. The employer and the worker together must meet the specific conditions for that target group.

How an Employer Claims the Credit

The employer cannot straightforward decide to claim the credit. They must file Form ITA 9061 or Form ITA 9062 (the pre-screening notice) with the state workforce agency before hiring or within 28 days after the employee starts work. The state agency then investigates whether the person truly belongs to a target group and issues a certification if they do.

The employer then reports the credit on Form 8884 (Work Opportunity Credit) when filing their business tax return. The credit is claimed for the tax year in which the employee was hired, though the amount depends on how long the person worked during that year and subsequent years. If the employee works at least 400 hours in the first year, the credit is larger than if they work fewer hours.

The state workforce agency is the gatekeeper. Without their certification, the IRS will not allow the credit, even if the worker genuinely belongs to a target group. This is why timing matters: employers who wait too long to submit the pre-screening notice may miss the important date and lose the credit entirely.

Credit Amounts and How They Vary

The credit is not a flat amount. It depends on two things: which target group the employee belongs to, and how many hours they worked in the first year of employment.

For most target groups, the credit is 25% of wages paid if the employee worked at least 120 hours but fewer than 400 hours in the first year, and 40% of wages paid if they worked 400 hours or more. The maximum credit per employee is $2,400 for the 25% calculation and $9,600 for the 40% calculation, though some groups have lower caps. Long-term unemployed workers and certain veterans have a maximum of $5,600 instead of $9,600.

Wages used to calculate the credit are limited to the first year of employment only. If an employee is hired in January and works through December, the employer counts wages paid during those 12 months. If they are hired in November, only wages through December count.

What Disqualifies an Employer From Claiming the Credit

An employer cannot claim the credit if the new hire is a family member, if they replaced another employee who was laid off, or if the position was previously held by someone else within the past six months. The credit is meant to expand the workforce, not to subsidize normal turnover.

The employer also loses the credit if they fail to obtain state certification. Even if the worker genuinely qualifies, no certification means no credit. Additionally, if the employer knowingly hires someone who does not belong to a target group and falsely claims they do, they face penalties and may owe back taxes plus interest.

Why This Credit Exists and How It Works in Practice

Congress created the WOTC in 1996 to reduce barriers to employment for people facing structural disadvantages in the job market. The logic is straightforward: if hiring someone from a disadvantaged group costs less in taxes, more employers will do it. The credit does not force hiring; it makes hiring more financially attractive.

In practice, the credit is most useful to employers who hire in volume and have the administrative capacity to track certifications. A small business hiring one person may find the paperwork burden outweighs the benefit. A large retailer or warehouse operation hiring dozens of workers from target groups can realize substantial tax savings. Some employers work with staffing agencies that handle the certification process on their behalf.

The Employee's Role and What They Report

The employee does nothing to claim or report the WOTC. They do not fill out a form, do not report it on their personal tax return, and do not receive any direct payment. The credit is entirely a business tax matter between the employer and the IRS. The employee may not even know the credit exists.

From the employee's perspective, the only relevant step is providing information to the employer (or the state workforce agency) that confirms they belong to a target group. This might mean providing proof of SNAP receipt, a letter from a vocational rehabilitation counselor, or documentation of a prior conviction. The employer uses this information to file the pre-screening notice with the state.

Frequently Asked Questions

Can an employee claim the WOTC on their personal tax return?

No. The WOTC is a business credit that only the employer can claim. It does not appear on the employee's Form 1040 or any personal tax document. The employee receives no direct tax benefit.

What happens if the employer does not file the pre-screening notice in time?

The credit is lost. The important date is 28 days after the employee starts work. If the employer misses this window, they cannot go back and claim the credit later, even if the worker genuinely qualifies. This is why employers should file the notice as soon as they know they have hired someone from a target group.

Does the employee have to stay employed for a certain length of time for the employer to claim the credit?

No minimum employment length is required to claim the credit, but the amount of the credit depends on hours worked. If the employee works fewer than 120 hours in the first year, the employer cannot claim the credit at all. If they work 120 to 399 hours, the credit is smaller than if they work 400 or more hours.

Can an employer claim the WOTC if they hire someone who belongs to multiple target groups?

Yes, but the employer claims the credit based on only one target group. The state workforce agency will certify the person under the group that yields the highest credit, or the employer can specify which group to use.

What if the state workforce agency denies the certification?

The employer cannot claim the credit. The agency may deny certification if the person does not meet the specific conditions for the target group they claim, or if the employer submitted incomplete information. The employer can request reconsideration or appeal, depending on the state's process.

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