Qualifying for the Lucrative Work Opportunity Tax
Summary: Business owners who invest in job seekers who have faced barriers to employment are eligible for the Work Opportunity Tax Credit. Click through to see how this act works, and how it may apply to your businesses.
The WOTC is an incentive to hire workers who typically have difficulty in finding jobs, including certain veterans. It’s available to employers who hire an individual in one of the WOTC targeted groups. Although it’s due to expire at the end of 2025, it may be extended by Congress.
The WOTC targeted groups include the following individuals:
- a qualified veteran.
- a qualified ex-felon.
- a designated community resident.
- a vocational rehabilitation referral.
- a summer youth employee.
- a supplemental nutrition assistance program (i.e., SNAP or food stamps) recipient.
- a supplemental security income (SSI) recipient.
- a long-term family assistance recipient.
- a qualified long-term unemployment recipient.
- a qualified IV-A recipient.
A “qualified IV-A recipient” is someone who is certified by a designated local agency as being a member of a family receiving assistance under certain state-funded programs.
Pre-screening employees
To claim the credit, employers must first pre-screen an employee and have the appropriate state government entity certify that the employee is a member of a targeted group. To satisfy this requirement, on or before the day that a job offer is made, a pre-screening notice (IRS Form 8850) must be completed by the job applicant and the employer.
Amount of the credit
The maximum tax credit amount is $2,400 to $9,600, depending on the targeted group and qualified wages paid to the new employee during the first year of employment. Generally, the credit is 40% of qualified first-year wages for individuals who work 400 or more hours in their first year on the job. If the individual works less than 400 hours but at least 120 hours or more, the credit percentage drops to 25%.
Qualified first-year wages
Qualified first-year wages are those paid during the one-year period beginning with the day the individual starts work. However, there is a limit to the amount of wages that can be used in calculating the credit. Generally, the maximum amount of wages that can be used to calculate the credit is $6,000 for the worker’s first year of employment. However, for certain categories of veterans, the maximum wages used for the credit can be as high as $24,000, thus yielding a tax credit of up to $9,600.
Example: John is the sole owner of Smith Hardware. Steve is a qualified veteran hired by John to work in the hardware store from July 1 to December 31. In 2025, Steve worked more than 400 hours and his wages for the six months are $20,000. Because he qualifies as a special type of veteran, his qualified first-year wages for purposes of calculating the credit are $18,000. Smith Hardware’s WOTC is $7,200 (40 percent of $18,000).
There are some limitations, however, on qualified wages that can be considered for the credit. For example, qualified wages for any employee are zero if:
- the employee didn’t work for you for at least 120 hours.
- the employee worked for you previously.
- the employee is your dependent.
- the employee is related to you. or
- 50% or less of the wages the employee received from you were for working in your trade or business.
If you qualify for this credit, seeking assistance from a CPA is recommended. Not only can a CPA help with getting you through the certification process and ensuring that all requirements are met, but he or she can complete the relevant tax forms you need to file with your tax return to obtain this lucrative tax credit.
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