Learn About the Work Opportunity Tax Credit

What Is the Work Opportunity Tax Credit?

The Work Opportunity Tax Credit (WOTC) is a federal tax incentive created by Congress to encourage businesses to hire workers from groups that historically face employment barriers. Rather than a benefit given directly to workers, this tax credit reduces the federal income taxes that employers owe when they hire people from specific target groups.

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The program was established in 1996 and has been modified several times since then. The most recent significant changes occurred in 2020 with the WOTC Improvements Act. The credit is administered by the U.S. Department of Labor in partnership with state workforce agencies.

Here's how it works in basic terms: When an employer hires someone who meets WOTC criteria, the business can claim a tax credit on its federal tax return. Depending on the target group and how long the employee works, the credit can range from $1,200 to $9,600 per employee. This means the employer pays less in federal taxes.

For example, if a retailer hires a person receiving TANF (Temporary Assistance for Needy Families) benefits and that person works for the company for at least 400 hours over a year, the employer might claim a $2,400 credit. If the business owes $50,000 in federal taxes that year, the credit would reduce that to $47,600.

The program currently exists in all 50 states, Washington D.C., and Puerto Rico. According to Department of Labor data, roughly 300,000 to 500,000 workers are hired under WOTC certifications annually, though not all potential participants are documented in official statistics.

Practical Takeaway: WOTC is primarily a hiring incentive for businesses, though it indirectly benefits workers by making employers more willing to hire from target groups. Understanding this program matters if you work in human resources, manage hiring for a business, or want to understand how government policies encourage employment for people facing barriers to work.

Understanding the Target Groups for WOTC

The Work Opportunity Tax Credit is only available when employers hire people who belong to specific categories designated by federal law. These "target groups" are individuals who historically experience obstacles finding jobs due to factors like disability, prior incarceration, age, or economic circumstances.

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The current target groups include individuals receiving TANF (Temporary Assistance for Needy Families), supplemental nutrition assistance, or certain disability benefits. People experiencing long-term unemployment—defined as unemployed for at least 27 consecutive weeks—also qualify. Veterans with service-connected disabilities and veterans on active duty who were recently discharged are included.

The program covers ex-offenders hired within one year of release from prison or within six months of conviction of a felony. Long-term family assistance recipients—people who received TANF for at least 18 months—are a separate group. Summer youth employed through certain work programs, vocational rehabilitation referrals, and certain Native Americans living on or near reservation lands are also included.

Additionally, the program covers individuals with disabilities hired through a vocational rehabilitation agency, a person receiving SSI (Supplemental Security Income), and designated community residents—generally people age 18-39 living in economically disadvantaged areas.

The specific rules for each group vary. For instance, an ex-offender must be hired within one year of release to receive the credit, while a TANF recipient simply needs to be currently receiving or recently have received the benefit. Some groups require an individual to have been unemployed for a minimum period; others do not.

State workforce agencies maintain information about which individuals in their states belong to WOTC target groups. The certification process typically involves state officials verifying that a job candidate meets target group criteria before the employer can claim the credit.

Practical Takeaway: If you're an employer considering WOTC, learning which target groups match your typical job candidates is the first step. If you're a job seeker, knowing whether you fall into a target group may make you more attractive to employers who understand the credit's benefits. Contacting your state's workforce agency can clarify whether you or someone you know fits these categories.

How the Certification Process Works

Before an employer can claim a Work Opportunity Tax Credit, the worker must be certified as belonging to a WOTC target group. This certification process is not automatic and requires specific steps involving both the employer and the state workforce agency.

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The process typically begins when an employer wants to hire someone. The business obtains a WOTC screening form, often called a "WOTC Pre-Screening Notice" or similar name depending on the state. This form is given to the job candidate before or as part of the hiring process. The form asks questions designed to determine whether the individual likely belongs to a WOTC target group.

The job candidate completes the form, providing information about their current or recent assistance benefits, employment history, housing situation, disability status, prior conviction record, or other relevant factors. Importantly, the candidate must provide information voluntarily—employers cannot require participation in WOTC screening as a condition of employment, though many do request it during the hiring process.

Once completed, the employer submits the form to the state workforce agency, usually electronically through the state's WOTC system. State officials review the submission and determine whether the individual appears to belong to a target group. This determination typically happens within a few days to a few weeks, depending on the state and whether the determination is straightforward or requires additional verification.

If the state agency certifies that the individual meets target group criteria, the employer receives certification confirmation. The employer can then claim the tax credit on their federal tax return for wages paid to that employee during a specified period, typically measured in hours worked or time employed.

Each state manages WOTC slightly differently, and some have different forms or processes. Some states have moved to online systems where employers and state agencies handle WOTC certifications entirely electronically. Other states still use paper-based processes, though this is becoming less common.

The key timeline involves the "hiring date." For most groups, certification must be initiated shortly after the hiring date—often within 28 days—for the employer to be able to claim the credit. This is why employers interested in WOTC must start the process promptly after hiring someone.

Practical Takeaway: If you're involved in hiring, understanding that WOTC certification takes time and has specific deadline requirements is important. You'll need to work with your state's workforce agency and track hiring dates carefully. If you're a job candidate who may qualify, understanding that this process exists and that employers will likely ask you screening questions helps you prepare with accurate information about your situation.

Credit Amounts and What Employers Can Claim

The amount of tax credit an employer can claim under WOTC depends on which target group the hired employee belongs to and how long the employee works for the company. Congress designed the credit structure to provide larger incentives for hiring groups facing greater employment barriers and to encourage longer-term employment.

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For most target groups, the basic structure is straightforward. If an employee works at least 120 hours during a 12-month period following the hiring date, the employer can claim a credit of $2,400 per employee. If the same employee works at least 400 hours during the same period, the credit increases to $2,400 times 1.5, or $3,600.

However, certain target groups receive higher credit amounts because they face greater employment challenges. For example, when employers hire individuals with disabilities through a vocational rehabilitation agency or people receiving SSI benefits, the credit can be substantially higher. Under current law, these groups can generate credits up to $9,600 per employee if the employment threshold is met.

Veterans with service-connected disabilities represent another category with enhanced credits, with potential amounts reaching $9,600 per employee depending on factors like the disability rating and time employed.

Long-term family assistance recipients—people who received TANF for 18 months or more—also receive higher credit potential. Their credit structure can reach $3,600 when employment thresholds are met, sometimes higher depending on specific circumstances.

It's important to understand that employers cannot claim these credits retroactively without limits. Generally, the employer must initiate the certification process within 28 days of hiring for most groups. Additionally, there are rules about how credits are claimed and carried forward. If an employer