While it’s not a grant in the traditional sense, the Work Opportunity Tax Credit (WOTC) is one of the most underused federal incentives available to small businesses — a direct reduction in your tax liability for hiring individuals from certain target groups who often face barriers to employment. Here’s how it works and how to claim it.
What Is the Work Opportunity Tax Credit?
WOTC is a federal tax credit available to employers who hire individuals from specific target groups certified as facing significant barriers to employment. Unlike a deduction (which reduces taxable income), a tax credit directly reduces the amount of tax you owe, making it a particularly valuable incentive.
Who Qualifies as a Target Group Employee?
Eligible new hires generally include individuals who are:
- Qualified veterans (including those with service-related disabilities)
- Long-term unemployment recipients
- Recipients of Temporary Assistance for Needy Families (TANF)
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Ex-felons
- Residents of designated Empowerment Zones
- Vocational rehabilitation referrals
- Supplemental Security Income (SSI) recipients
- Summer youth employees (ages 16–17) living in Empowerment Zones
Specific eligibility criteria and documentation requirements vary by target group — always confirm current details, since program rules and covered groups can be updated by Congress.
How Much Is the Credit Worth?
The credit amount depends on the target group and the number of hours worked, generally structured as:
- Up to $2,400 for most target group hires (40% of up to $6,000 in first-year wages)
- Up to $9,600 for certain qualified veterans, particularly those with service-related disabilities
- Up to $9,000 over two years for long-term TANF recipients (a two-year credit structure)
The credit is generally based on 40% of qualified first-year wages (up to the applicable wage cap) for employees who work at least 400 hours, with a reduced 25% credit for those working between 120–400 hours.
How to Claim the WOTC: Step by Step
1. Pre-Screen the New Hire
Before or on the day of the job offer, have the new employee complete IRS Form 8850 (Pre-Screening Notice and Certification Request), along with the Department of Labor’s ETA Form 9061 or 9062.
2. Submit to Your State Workforce Agency
Submit the completed forms to your State Workforce Agency (SWA) within 28 days of the employee’s start date — this deadline is strict and missing it disqualifies the credit for that hire.
3. Receive Certification
The state agency reviews the submission and certifies whether the employee qualifies under a WOTC target group.
4. Claim the Credit on Your Tax Return
Once certified, claim the credit using IRS Form 5884 (for most businesses) when filing your federal tax return. Tax-exempt organizations use a different form (Form 5884-C) for hiring qualified veterans.
Timing Matters: Don’t Miss the 28-Day Window
The single most common reason businesses miss out on WOTC is failing to submit Form 8850 within 28 days of the employee’s start date. Building this pre-screening step into your standard onboarding process — checking eligibility before or on the job offer date — is the most reliable way to avoid missing the deadline.
Is WOTC Worth the Administrative Effort?
For businesses that hire regularly, particularly in industries like retail, food service, hospitality, and manufacturing where target group candidates are more commonly part of the hiring pool, WOTC can add up to a meaningful annual tax benefit with relatively modest paperwork — especially if the pre-screening process is built into standard onboarding rather than handled as an afterthought.
Working With a WOTC Service Provider
Many businesses, particularly those with higher hiring volume, use a WOTC screening service or work with their payroll provider (several major payroll platforms offer built-in WOTC screening) to automate the pre-screening and filing process, reducing the administrative burden and missed-deadline risk.
Frequently Asked Questions
Can a very small business (just a few employees) claim WOTC? Yes — there’s no minimum business size requirement. Any employer, regardless of size, can claim the credit for qualifying hires, though the administrative effort may be more worthwhile for businesses that hire more frequently.
Does WOTC apply to rehired employees? Generally, no — WOTC is intended for new hires, and rehiring a former employee typically doesn’t qualify, though specific rules can vary; confirm with a tax professional for your specific situation.
Is WOTC the same as a small business grant? No — WOTC is a tax credit that reduces your tax liability, not a grant that provides upfront cash. It only provides value when you have tax liability to offset, typically realized when you file your return.
Conclusion
The Work Opportunity Tax Credit is a genuinely underused incentive that rewards businesses for hiring from specific target groups, with real dollar value that can meaningfully reduce your tax bill if built into your standard hiring process. The key to actually capturing this benefit is discipline around the 28-day filing window — consider using a WOTC screening service or your payroll provider’s built-in tools if you hire regularly. For a broader look at government funding options for small businesses, see our guide on [small business grants in the U.S.: complete guide].