Filing taxes for a business can be stressful. Whether it’s the distribution of tax forms like W-2s or 1099s, filing taxes for your business with Forms 1120 or 1065, tracking tax withholding throughout the year for things like Social Security and Medicare taxes, or keeping track of any tax credits your business qualifies for, there’s quite a bit of work involved leading up to and during tax season that business owners need to ensure gets done before those impending deadlines. This is all on top of all the other usual day-to-day tasks that need to be performed in order to keep your business running smoothly. Suffice it to say that, heading into tax season, business owners may find themselves feeling more stressed or overwhelmed than usual.
At Payday HCM, we’re familiar with the stress that can accompany tax season. We receive plenty of tax-related questions all year round, whether it be regarding withholdings, filings, or compliance issues. One big area for questions, though, is tax credits. It can be hard, amidst all of the other things you may be doing during tax season, to take the time to research any tax credits your business may qualify for. This includes credits like the Work Opportunity Tax Credit (WOTC).
So, in this article, we’ll be going over what the Work Opportunity Tax Credit (WOTC) is and how it works. First off, we’ll cover the importance of the WOTC and why businesses need to know about it. Then, we’ll dive into the inner workings of the WOTC—what it is and who it applies to. Finally, we’ll go over the requirements for claiming the WOTC and what the filing process looks like. By the end of this article, you’ll be an expert in all things WOTC and feel ready to take on this year’s tax season with confidence.
In this article, you will learn:
- Why Businesses Need to Know About the WOTC
- What Is the Work Opportunity Tax Credit (WOTC)?
- How Does the Work Opportunity Tax Credit (WOTC) Work?
Why Businesses Need to Know About the WOTC
Before we get into the nuts and bolts of the Work Opportunity Tax Credit, we’ll first cover its importance and why businesses need to know about it.
Supporting Workforce Growth and Inclusion
While the WOTC does obviously provide financial incentives, it’s perhaps more notable how the WOTC can encourage employers to consider candidates from underrepresented or disadvantaged groups, including veterans, individuals with prior justice involvement, and long-term unemployed workers.
This has a variety of different benefits. Aside from filling a business's hiring need, hiring an individual from one of the qualifying groups under the WOTC can provide opportunities to individuals who may not have had them before and bring a wider range of perspectives to the workplace.
A Valuable Tax Credit
Then, there is the financial incentive, which, while not as important as the social impacts of the WOTC, is nevertheless beneficial to employers. The credit can provide up to several thousand dollars in tax savings per eligible hire, depending on wages paid and hours worked. There is no cap on the number of employees an organization can claim, making WOTC especially beneficial for employers with frequent or high-volume hiring.
Because the credit is tied to standard hiring activity, businesses do not need to create new roles or change job requirements to benefit. Instead, WOTC rewards employers for following a compliant screening and certification process when hiring eligible candidates. The credit is also available to businesses of all sizes and in any industry, meaning any business can claim the credit.
What Is the Work Opportunity Tax Credit (WOTC)?
Now that we understand the importance of the WOTC, we can look more closely at what the WOTC is.
A Federal Hiring Incentive Program
The Work Opportunity Tax Credit (WOTC) is a federal tax credit administered jointly by the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL). It’s meant to incentivize employers to hire individuals from specific groups that historically experience challenges in securing employment.
The credit applies only to new hires and is based on qualified wages paid during the employee’s first year of employment. Rehired former employees do not qualify for the credit. The credit is available for any wages paid to employees who began work on or before December 31, 2025. As mentioned earlier, the credit is available to businesses of any size, regardless of industry.
Targeted Groups and Credit Amounts
To qualify for WOTC, a new employee must be certified as a member of one of several IRS-designated targeted groups. These groups include, but are not limited to:
- Qualified veterans
- Recipients of SNAP benefits
- Vocational rehabilitation referrals
- Formerly incarcerated individuals
- Qualified long-term unemployment recipients.
In most cases, employers may claim a credit equal to 40% of the first $6,000 in qualified wages, for a maximum of $2,400 per eligible employee. Certain veteran categories allow for higher wage thresholds, resulting in larger potential credits.
How Does the Work Opportunity Tax Credit (WOTC) Work?
The Work Opportunity Tax Credit does involve certain steps in order for employers to verify an employee’s eligibility for the WOTC and for employers to claim the credit.
Pre-Screening and Certification Requirements
The WOTC process begins at or before the job offer stage. Employers must complete IRS Form 8850, the Pre-Screening Notice and Certification Request, with information provided by the job candidate. This form must be submitted to the appropriate state workforce agency (SWA) within 28 days of the employee’s start date.
Employers also must complete and submit one of two forms from the DOL. The first, ETA Form 9061, or the Individual Characteristics Form (ICF), provides information about an applicant’s answers to the WOTC questionnaire. The second, ETA Form 9062, is for applicants who have been pre-screened for the tax credit by an SWA. These forms must still be submitted alongside an IRS Form 8850.
The state workforce agency reviews the submission and determines whether the new hire qualifies as a member of a targeted group. If approved, the employer receives a certification, which is required before the credit can be claimed.
Claiming the Credit and Maintaining Compliance
After certification and once the employee meets minimum hours-worked requirements (employees must work 120 hours within their first year of employment), employers may claim the credit when filing federal taxes. Employers use IRS Form 5884, typically in conjunction with Form 3800 (General Business Credit).
Qualified tax-exempt organizations may claim WOTC for eligible veteran hires using Form 5884-C to offset payroll taxes. Employers should maintain documentation related to certifications, hours worked, and wages paid to ensure compliance and support the credit in the event of an IRS review or audit.
Your Business Deserves More Credit
Tax season can be stressful, especially for business owners. Amidst everything else you already have to do in order to keep your business running, you also need to carve out time at the start of the year to ensure your business files its taxes and remains compliant (and that’s not even including your own individual taxes). It’s like that you may not have time to think about the kinds of tax credits your business can claim. Or, even worse, you may file your taxes and, upon seeing how much you might owe, wonder if there were any credits you could have claimed to help soften the blow. Luckily, with the information provided in this article, you’ll have the knowledge you need to tackle this year’s tax season with ease.
Between the day-to-day tasks, meetings with vendors, long-term problem-solving, and general supervision that comes with running a business, it’s easy for certain things to slip through the cracks. This is especially true with taxes—you probably know that your business is paying them, but what exactly are the taxes that employers are expected to pay? Check out our article for a full breakdown of employer taxes, so you can have a full understanding of all the different taxes you are expected to pay as an employer.
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