What if we told you there is a federal tax credit worth up to $9,600 per employee that most small business owners have never heard of? It is called the Work Opportunity Tax Credit, and it has been around since 1996. Yet in our experience, fewer than 10% of eligible businesses actually claim it.
What Is the WOTC?
The Work Opportunity Tax Credit is a federal tax credit available to employers who hire individuals from specific target groups that have historically faced barriers to employment. It is designed to incentivize hiring and it directly reduces your tax bill dollar for dollar.
Who Qualifies?
The target groups include veterans, SNAP recipients, ex-felons, individuals receiving long-term unemployment benefits, summer youth employees from empowerment zones, and several other categories. The key point is that many of these individuals are already in your applicant pool. You just need to identify them.
How Much Is It Worth?
The credit ranges from $2,400 to $9,600 per qualifying employee depending on the target group and hours worked. For most small businesses hiring from the general labor market, the $2,400 credit per qualifying hire is most common. Hire five qualifying employees in a year and that is $12,000 directly off your tax bill.
How to Claim It
Screen Before or On the Day of Hire
This is critical. You must submit IRS Form 8850 within 28 days of the employee's start date. If you miss this window, you lose the credit for that hire entirely. The best practice is to include the screening questionnaire as part of your standard hiring paperwork.Certify Through Your State Workforce Agency
After submitting Form 8850, your state workforce agency verifies the employee's eligibility. This process is free and typically takes 2-4 weeks.Claim on Your Tax Return
Once certified, you claim the credit on IRS Form 5884 when you file your business tax return.Year-End Strategy
If you are planning to hire before December 31st, build WOTC screening into the process now. The credit applies to the tax year in which the employee starts work, so a hire in December counts for the current year's return.
Common Misconceptions
The WOTC does not affect the employee negatively in any way. It does not reduce their wages or benefits. It is purely an employer benefit. Also, claiming the WOTC does not increase your audit risk. It is a legitimate, well-established credit that the IRS fully expects businesses to claim.
Note: NexGen does not provide tax advice or prepare tax returns. This article is for informational purposes. Talk to your CPA or tax professional about whether the WOTC applies to your situation. We partner with your tax preparer and advisors to keep your financial records organized so they can identify and claim every credit you qualify for.