As explained by the IRS, 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.
The agency emphasizes that this is a one-time credit for each new hire, and an employer cannot claim the credit for employees who are rehired. The IRA will prorate: A 25% rate applies to wages for individuals with 120 to 399 hours of service. And for certain qualified-veteran-targeted groups, employers may consider up to $24,000 in wages in determining the WOTC.
Is your business eligible?
The IRS explains that businesses of any size can qualify for the WOTC 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. The nuts and bolts:
- If an employer is taxable, it can claim the credit against income taxes.
- If an employer is eligible but tax exempt, it can claim the credit only against payroll taxes and only for wages paid to members of the qualified-veteran-targeted group.
This credit is available for wages paid to certain individuals who begin work on or before Dec. 31, 2025.
How to file
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 the appropriate 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.
Figuring out your eligibility can get complicated, so be sure to work with a tax professional. Contact us if you have any accounting questions.