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Small businesses can benefit from the work opportunity tax credit

Written on May 27, 2022

The work opportunity tax credit is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. This credit is available for wages paid to certain individuals who begin work on or before Dec. 31, 2025. 

The work opportunity tax credit is equal to 40% of up to $6,000 wages paid or incurred with a maximum credit of $2,400, for an employee who: 

  • Is in their first year of employment 

  • Is certified as being a member of an eligible group 

  • Works at least 400 hours of services for that employer 

This is a one-time credit for each new hire and an employer cannot claim the credit for employees who are rehired. 

A 25% rate applies to wages for individuals with 120 to 399 hours of service. 

Up to $24,000 in wages may be considered in determining the WOTC for certain qualified veteran targeted group. 

Who is eligible for the credit? 

Businesses of any size can qualify for work opportunity tax credit when they hire individuals from eligible groups who regularly face major obstacles to employment. 

Both taxable and certain tax-exempt employers located in the United States and some U.S. territories can claim this credit. Here’s how: 

  • If an employer is taxable, they can claim the credit against income taxes. 

  • If an employer is eligible but tax-exempt, they can claim the credit only against payroll taxes and only for wages paid to members of the qualified veteran targeted group. 

How to claim the credit 

Filing for the credit is simple. 

  • The employer and the job applicant must complete Form 8850 Pre-Screening Notice and Certification Request for the Work Opportunity Credit and submit it to State Workforce Agency within 28 days of the new employee’s start date. Employers should not submit Form 8850 to the IRS. 

  • After the employee receives certification that they are a member of one of the 10 targeted groups, the credit is figured on Form 5884, Work Opportunity Credit. Then the credit is claimed on Form 3800, General Business Credit. Tax-exempt employers file Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. 

The credit is limited to the amount of business income tax liability or employer’s share of Social Security tax owed. Any unused credit is subject to the normal credit carry-back and carry-forward rules.