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The IRS reminded employers this week about a tax credit available to businesses that hire long-term unemployment recipients and other groups of workers facing significant barriers to employment.

The Work Opportunity Tax Credit (WOTC), which has been extended until the end of 2025 under a law enacted in December, can be a helpful tool for new and existing small businesses.

This tax benefit encourages employers to hire workers certified as members of any of 10 targeted groups facing barriers to employment. Among these 10 groups are long-term unemployment recipients who have been jobless for at least 27 consecutive weeks and have received state or federal unemployment benefits during part or all of that time.

The other nine groups include certain veterans and recipients of various kinds of public assistance, among others. These groups are:

  • Temporary Assistance for Needy Families (TANF) recipients
  • Unemployed veterans, including disabled veterans
  • Formerly incarcerated individuals
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • Vocational rehabilitation referrals
  • Summer youth employees living in Empowerment Zones
  • Supplemental Nutrition Assistance Program (SNAP) recipients
  • Supplemental Security Income (SSI) recipients
  • Long-term family assistance recipients

The amount of the tax credit under WOTC equals a percentage of qualified wages paid in a given tax year to an employee certified as being a member of one of the groups specified under the law.

The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.

To qualify for the credit, an eligible employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency (SWA).

Normally, Form 8850 must be submitted to the SWA within 28 days after the eligible worker begins work. But under a special relief provision, a Nov. 8, 2021, submission deadline applies to two groups of new hires: qualified summer youth employees living in Empowerment Zones and designated community residents living in Empowerment Zones, which are economically disadvantaged areas.

To qualify for the Nov. 8 submission deadline, eligible employees must start work on or after Jan. 1, 2021, and before Oct. 9, 2021. Other requirements and further details can be found in Notice 2021-43 and the instructions to Form 8850.

Though the credit is not available to tax-exempt organizations for most groups of new hires, a special rule allows them to claim the WOTC for hiring qualified veterans. These organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.

For more information about the Work Opportunity Tax Credit, visit IRS.gov/wotc.