How the work opportunity tax credit helps clients before it ends in 2025

The work opportunity tax credit (WOTC) is one of those incentives that can easily slip under the radar during a busy season. But with the credit set to sunset at the end of 2025, now is the time for practitioners to bring it into client conversations. Helping business clients act before the deadline can translate into significant tax savings and reinforce your role as a trusted advisor.

The WOTC rewards employers for hiring individuals from targeted groups who’ve historically faced barriers to employment. It applies to wages paid to qualifying employees who begin work before Jan. 1, 2026. That deadline is approaching quickly, which makes this an important season for tax professionals to highlight WOTC opportunities.

What makes the work opportunity tax credit timely for businesses and tax pros

Several factors make the WOTC particularly relevant now:

• Tight labor market pressures. Many businesses are hiring, and owners are open to exploring incentives that lower costs.
• Carryback potential. Unused credits can be carried back one year or forward up to 20 years, making the WOTC worth revisiting even if clients missed it previously.
• Multiple client types benefit. From small businesses bringing on seasonal help to nonprofits hiring qualified veterans, this credit can apply broadly across industries.

For practitioners, this means the WOTC is not just a compliance item, but a proactive planning opportunity you can highlight during year-end reviews and onboarding discussions.

Who qualifies for the work opportunity tax credit?

Employers of any size can claim the credit when they hire workers certified as members of one of these 10 groups:

1. Temporary Assistance for Needy Families (TANF) recipients
2. Qualified veterans (with subcategories for unemployment duration, SNAP benefits or service-connected disabilities)
3. Qualified ex-felons
4. Designated community residents (living in empowerment zones or rural renewal counties)
5. Vocational rehabilitation referrals
6. Summer youth employees (ages 16–17, living in empowerment zones)
7. Supplemental Nutrition Assistance Program (SNAP) recipients
8. Supplemental Security Income (SSI) recipients
9. Long-term family assistance recipients
10. Long-term unemployment recipients (unemployed at least 27 weeks and received unemployment compensation)

How the work opportunity tax credit is calculated

The work opportunity tax credit is based on a percentage of qualified wages paid to eligible employees. The credit generally equals 40% of up to $6,000 in first-year wages, for a maximum of $2,400 per employee, as long as the individual works at least 400 hours. If the employee works between 120 and 399 hours, the credit rate drops to 25%.

To qualify for the 40% rate, the employee must:

• Be in their first year of employment
• Be certified as a member of one of the 10 targeted groups
• Perform at least 400 hours of services for the employer

A few key mechanics to remember:

• The credit is claimed on Form 5884, Work Opportunity Credit, and reported through Form 3800, General Business Credit, with the income tax return.
• Wages claimed for the WOTC reduce the employer’s deduction for compensation.
• The credit is limited to the employer’s business income tax liability, or for tax-exempt organizations hiring qualified veterans, the Social Security tax owed.
• A 25% rate applies to wages for employees who work at least 120 but fewer than 400 hours.
• Special rules apply for certain groups, including veterans (up to $24,000 in wages for some categories) and long-term family assistance recipients (a two-year credit of up to $9,000 combined).

Special rules for tax-exempt employers

Tax-exempt organizations can only claim the WOTC when they hire qualified veterans. Instead of reducing income tax liability, these organizations use Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, to claim the credit against their share of Social Security tax. 

Practitioner note: The IRS specifically cautions that tax-exempt employers should not reduce payroll tax deposits while waiting for the credit. Doing so can create compliance issues or penalties.

Example: How seasonal hiring can generate WOTC savings

Consider a landscaping company that hires six workers for the summer. Three qualify as designated community residents, each working over 400 hours, earning $6,000. The WOTC provides a $2,400 credit per employee, generating a total savings of $7,200 for the business.

For small employers, these savings can be the difference between simply covering payroll versus reinvesting in growth. And as their tax professional, you’re the one positioned to identify and secure that opportunity.

Steps for tax professionals to claim the work opportunity tax credit

To use this credit effectively for your clients:

1. Pre-screen new hires. Ensure Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, is completed by the employee and employer on or before the job offer date.
2. Submit timely. Send Form 8850 to the state workforce agency (not the IRS) within 28 days of the employee’s start date. The Department of Labor may require additional forms (such as ETA Form 9061 Individual Characteristics Form (ICF) or ETA Form 9062 Conditional Certification Form (CC)).
3. Maintain records. Keep documentation for at least three years after the return is filed, including certifications and payroll data.
4. Coordinate with other credits. Remember that wages used for WOTC can’t also be applied to credits like the employee retention credit.
5. Avoid double-counting wages. Employers may claim more than one wage-based credit for the same employee, but the same wages cannot be used for multiple credits.
6. See IRS WOTC guidance for further details.

What tax professionals should do before the work opportunity tax credit expires

The WOTC is more than a compliance checkbox. It’s a planning strategy you can bring forward in conversations with business clients right now. By highlighting it during year-end reviews, onboarding sessions or hiring consultations, you can add measurable value and position yourself as an essential advisor.

With the credit set to sunset for employees starting work after Dec. 31, 2025, now’s the time to ensure clients don’t miss out on this opportunity. NATP will continue to keep you informed on timely tax strategies like the WOTC so you can confidently guide your clients through every season.