With many companies enduring a tight labor market, employers should be aware of a useful tax credit available to them for employing long-term unemployed individuals and other categories of employees who face major employment impediments. If your company is currently employing, the Work Opportunity Tax Credit (WOTC) may be beneficial.
Background
The WOTC was prolonged till the end of 2025 by legislation passed in December. This long-standing tax break encourages firms to recruit individuals who are verified as members of one of 10 specific groups encountering employment hurdles. Millions of Americans have been without work at some point since the pandemic started, but one of the targeted categories is jobless people who have been unemployed for at least 27 weeks.
Eligible Employees
Among the other groups are select veterans and users of different types of public assistance. The ten groupings are as follows:
- Temporary Assistance for Needy Families (TANF) beneficiaries
- Unemployed veterans, including disabled veterans
- Formerly incarcerated citizens
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental Security Income (SSI) beneficiaries
- Long-term family assistance beneficiaries
- Long-term unemployment beneficiaries.
Qualifying for the Credit
To qualify for the credit, a business must first acquire certification from their state workforce agency by filing IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit (SWA). Please do not send this form to the IRS.
The SWA must receive Form 8850 within 28 days of the qualified worker starting work. The WOTC is claimed by eligible companies on their federal income tax return. It is typically calculated using salaries earned to qualified workers during their first year of employment. Form 5884, Work Opportunity Credit, is used to calculate the credit, which is subsequently claimed on Form 3800, General Business Credit.
Though tax-exempt institutions are not eligible for the credit for most groups of new recruits, a unique regulation permits them to claim the WOTC for recruiting qualifying veterans. Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations, is used by these associations to claim the credit against payroll taxes.
If you’re a small company owner who wants to take advantage of this tax break but isn’t sure if you qualify, assistance is available.
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