Work opportunity tax credit 2025 updates

Understanding the Work opportunity tax credit landscape in 2025

The Work opportunity tax credit continues to serve as one of the most valuable hiring incentives available to employers in 2025. The Consolidated Appropriations Act, 2021 (Section 113 of Division EE, P.L. 116-260) authorized the extension of the WOTC until December 31, 2025. This federal tax credit can provide up to $9,600 per qualified employee, making it essential for businesses to understand the latest requirements and opportunities.

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring and employing individuals from certain targeted groups who have faced significant barriers to employment. The program incentivizes workforce diversity while facilitating access to good jobs for American workers who have historically faced employment challenges.

Recent programmatic changes have streamlined certification processes while maintaining strict compliance requirements. Understanding these updates is crucial for employers looking to maximize tax savings while contributing to meaningful employment opportunities.

Current program status and extension through 2025

The current authorization provides employers with certainty for strategic hiring decisions throughout 2025, though the program's future beyond this date remains uncertain. The program's popularity stems from its impressive track record, with the Department of Labor reporting about $1 billion in tax credits paid out every year across an average of two million claims.

In February 2021, U.S. senators from both sides of the aisle introduced legislation to make the WOTC program permanent. However, until permanent authorization occurs, employers must plan their hiring strategies within the current timeline.

For employers planning their 2025 hiring strategies, the WOTC is available for wages paid to specific individuals who begin work on or before December 31, 2025. This timing requirement makes planning essential for maximizing the credit's value throughout the year.

Updated certification requirements and critical deadlines

Recent guidance has significantly strengthened certification requirements and submission deadlines. TEGL 16-20, issued on Nov. 20, 2023, provided updated guidance with the following rules effective on Feb. 20, 2024: Both the IRS 8850 and 9061 need to be submitted within 28 calendar days from the employee's start date.

The 28-day deadline for form submission has become increasingly strict and represents a critical compliance point. The employer has 28 calendar days from the new employee's start date to submit Form 8850 to the designated local agency located in the state in which the business is located (where the employee works).

Enhanced documentation requirements now include:

1. Form 8850 (Pre-Screening Notice) - Must be completed by both employer and job applicant on or before the job offer date
2. ETA Form 9061 or 9062 - Required Department of Labor forms providing detailed employee information
3. Proper certification from the state workforce agency - Verification that the employee belongs to a qualifying target group

Applications marked "Documentation Forthcoming" will be updated to the Denial Pending More Information (DPMI) status. These applications have 365 days to submit the needed information, after which these applications will be denied.

Target groups and eligibility criteria for 2025

Any employer that hires and pays or incurs wages to specific individuals who are certified by a designated local agency as members of one of 10 targeted groups may claim the WOTC.

The current target groups include:

Standard target groups (up to $6,000 in eligible wages):

• Qualified recipients of Temporary Assistance for Needy Families (TANF)
• Qualified ex-felons (hired within one year of conviction or release)
• Designated community residents (living in empowerment zones)
• Vocational rehabilitation referrals
• SNAP recipients (ages 18-39)
• SSI recipients
• Qualified long-term unemployment recipients

Higher-value target groups:

• Long-term family assistance recipients - Up to $10,000 in eligible wages
• Summer youth employees - Up to $3,000 in eligible wages
• Qualified veterans - Multiple subcategories with eligible salaries ranging from $6,000 to $24,000

Veteran subcategories offer the highest credit potential:

• Veterans receiving SNAP assistance (up to $6,000)
• Veterans unemployed 4 weeks to 6 months (up to $6,000)
• Veterans with service-connected disabilities (up to $12,000)
• Veterans unemployed over 6 months (up to $14,000)
• Veterans with service-connected disabilities and unemployed for over 6 months (up to $24,000)

Credit calculations and maximum benefits

In general, the WOTC is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an individual who performs at least 400 hours of service. Thus, the maximum tax credit is generally $2,400. A 25% rate applies to wages for individuals who perform fewer than 400 but at least 120 hours of service for the employer.

The credit structure creates incentives for substantial employment:

Hours-based credit tiers:

• 120-399 hours worked: 25% of eligible wages
• 400+ hours worked: 40% of eligible wages
• Under 120 hours: No credit available

Maximum credit amounts by target group:

• Standard groups: Up to $2,400 per employee (40% of $6,000)
• Long-term family assistance recipients: Up to $4,000 per employee (40% of $10,000)
• Veterans with service-connected disabilities: Up to $4,800 per employee (40% of $12,000)
• Veterans unemployed over 6 months: Up to $5,600 per employee (40% of $14,000)
• Veterans with service-connected disabilities and unemployed over 6 months: Up to $9,600 per employee (40% of $24,000)

Second-year benefits for long-term family assistance recipients: Unique among WOTC target groups, long-term family assistance recipients can generate credits in both their first and second years of employment. The second-year credit applies 50% to up to $10,000 in wages, providing an additional $5,000 potential credit per employee.

Integration with other tax credits and compliance strategies

Generally, the wages used to calculate the WOTC cannot be used to calculate other wage-based credits. However, an employer may be able to claim more than one wage-based credit for the same employee. Provided the same wages are not used to calculate each credit, an employer may be able to claim the WOTC and another credit, such as the American Rescue Plan's Employee Retention Credit (ERC).

Strategic credit stacking opportunities:

• WOTC can apply to first-year wages up to the target group maximum
• Employee Retention Credits can apply to wages during qualifying periods
• R&D tax credits can apply to wages for qualifying research activities
• Other specialized credits can apply to wages for specific purposes

Tax-exempt organization benefits: Although the credit generally is not available to tax-exempt organizations, a special provision allows them to claim the WOTC against the employer's share of Social Security tax for hiring qualified veterans. Tax-exempt organizations use Form 5884-C instead of the standard Form 5884 to claim their veteran hiring credits against payroll taxes.

Best practices for WOTC optimization in 2025

Implementing effective screening procedures:

• Include WOTC screening in standard onboarding procedures
• Train hiring managers to recognize potential target group indicators
• Use applicant tracking systems that flag potential WOTC candidates
• Develop partnerships with workforce development agencies and veteran service organizations

Managing the certification process:

1. Establish clear responsibilities for WOTC form completion
2. Create calendar reminders for 28-day submission deadlines
3. Develop expedited review processes for urgent applications
4. Maintain communication with state workforce agencies

Quality control measures:

• Review all forms before submission for completeness and accuracy
• Verify employee eligibility against target group criteria
• Confirm proper documentation supporting target group membership
• Follow up on pending applications to prevent DPMI status

Leveraging technology solutions: Modern WOTC management increasingly relies on technology solutions that automate screening, tracking, and compliance functions. Instead's platform provides comprehensive WOTC management capabilities that help businesses identify qualifying employees, calculate potential credits, and maintain compliance with all requirements.

Advanced platforms offer features including automated applicant screening, deadline tracking, state workforce agency form submission, and credit calculation tools. These technological solutions reduce administrative burden while improving accuracy and compliance rates.

Planning for program uncertainty beyond 2025

While legislative efforts to make WOTC permanent continue, prudent planning should consider potential program expiration. Strategies include:

• Maximizing WOTC benefits during the current authorization period
• Developing alternative hiring incentives and workforce development programs
• Building relationships with target populations that provide value beyond tax credits
• Creating internal systems that can adapt to changing program requirements

According to a study by Equifax, WOTC-eligible hires are less likely to leave their jobs within the first year of employment, remain in their careers as long or longer than their non-eligible counterparts, and advance through the ranks as quickly as their traditionally hired peers. This data suggests that WOTC hiring provides benefits beyond tax savings.

Frequently asked questions

Q: Can I claim WOTC for employees hired before I knew about the program?

A: No, WOTC requires pre-screening before or on the day of the job offer. Retroactive claims are not permitted, and the 28-day submission deadline cannot be extended for late discovery of the program.

Q: What happens if I miss the 28-day deadline for form submission?

A: Forms submitted after 28 days will be denied for tardiness. There are minimal exceptions to this rule, and appeals are generally unsuccessful for timing-related denials.

Q: Can I claim WOTC for part-time employees?

A: Yes, but the employee must work at least 120 hours during their first year of employment to qualify for any credit. The credit amount depends on total hours worked, with full credits requiring 400+ hours.

Q: How do I handle WOTC for employees who quit before completing 120 hours?

A: Employees who work fewer than 120 hours during their first year are not eligible for WOTC benefits, regardless of their target group membership or certification status.

Q: Can the same employee generate WOTC benefits if hired by different companies?

A: Yes, each qualifying hire by each employer can generate WOTC benefits, provided all requirements are met. However, rehiring the same employee within the same company does not qualify for additional WOTC benefits.