Understanding the Nuances and Misconceptions of the Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) has been a crucial yet often misunderstood incentive for employers across the United States. Designed to encourage hiring from historically disadvantaged groups, WOTC offers a financial benefit to businesses while simultaneously helping individuals secure stable employment. Despite its long history and impact, many employers remain unaware of how WOTC truly works and how it can significantly improve their bottom line.
In this article, we’ll explore the purpose of WOTC, common misconceptions, and key nuances that employers should understand when considering participation in the program.
The Purpose and Intent of WOTC
The WOTC program was designed to:
- Provide job opportunities to individuals who face barriers to employment.
- Offer financial incentives to employers who hire from targeted groups.
- Strengthen the economy by encouraging workforce participation and reducing reliance on government assistance programs.
Since its inception in 1996 under President Clinton, WOTC has continued to evolve, but its roots date back even further to the Targeted Jobs Act of 1978 under President Carter. Today, WOTC remains a powerful tool for both employers and job seekers alike.
Common Misconceptions About WOTC
1) Many Employers Think They Don’t Hire WOTC-Eligible Employees
One of the biggest misconceptions about WOTC is that many businesses assume they don’t hire employees from WOTC target groups. However, historical data suggests otherwise:
- More than 60% of all WOTC certifications come from individuals who qualify under the SNAP (food stamp) and TANF (Temporary Assistance for Needy Families) target groups.
- Since the pandemic, estimates suggest that over 45 million Americans are eligible for WOTC based on SNAP, TANF, or SSI participation.
Even employers who believe they don’t hire from these groups may be leaving money on the table by not screening employees for WOTC eligibility.
2) WOTC Credits Are Non-Refundable—But That’s a Good Thing
Unlike other tax incentives, WOTC credits are non-refundable, meaning they offset federal income tax liability but don’t result in a cash refund. However, for-profit and non-profit entities can both participate, with non-profits applying the credit against payroll taxes.
Additionally, businesses with Net Operating Losses (NOLs) can carry forward WOTC credits for up to 20 years, allowing them to use the credits when they return to profitability.
3) WOTC Is Not Just for Large Corporations
Approximately 80% of WOTC-certified credits have been earned by companies with over $250 million in revenue. However, small and mid-sized businesses can and should participate.
- There is no limit to the number of WOTC credits a business can earn annually.
- Employers can claim credits every year, making WOTC a perpetual participation program.
4) WOTC Is a Federal Program, But Certifications Happen at the State Level
Many businesses assume WOTC is handled solely by the Department of Labor (DOL) and the IRS, but state workforce agencies are the authorities responsible for issuing individual WOTC certifications.
- Employers must submit WOTC applications within 28 days of the hiring decision.
- Delayed or missed submissions mean lost tax credits.
5) WOTC Has Not Been Riddled With Fraud Like Other Programs
Unlike programs like the Employee Retention Tax Credit (ERC), which have seen widespread fraud, WOTC remains a highly regulated and low-risk program due to oversight from the DOL, IRS, and state workforce agencies.
Key Nuances of WOTC in 2025
1) Who Is Eligible?
Only new W-2 employees qualify for WOTC credits—rehired employees and independent contractors (1099 workers) are not eligible.
2) There Are Nine Target Groups in 2025
The last new target group was added in 2016, and while WOTC continues to evolve, as of 2025, there are still nine key groups eligible for credits.
3) Electronic Screening Has Been Allowed Since 2012
The IRS and DOL began allowing electronic WOTC screening in 2012, enabling employers to integrate WOTC screening into their applicant tracking, onboarding, and human capital management (HCM) systems.
4) Flow-Through Entities Can Benefit
For flow-through entities, WOTC credits flow through to the owner’s K-1, allowing owners to personally benefit from tax savings.
5) WOTC Is Set to Expire in 2025—But There’s a Push for Permanency
WOTC is currently set to expire on December 31, 2025, but legislators are pushing for an extension and even permanent inclusion in the tax code, similar to Research & Development (R&D) tax credits.
Congressman Lloyd Smucker (PA-11) has reintroduced the Improve and Enhance the Work Opportunity Tax Credit Act, while Senators Bill Cassidy (R-LA) and Maggie Hassan (D-NH) have introduced similar legislation to strengthen WOTC for the future.
Why Employers Should Take Advantage of WOTC
For employers of all sizes, WOTC presents an ongoing opportunity to reduce tax liabilities while making a real difference in workforce development. Despite misconceptions and underutilization, the program remains one of the most effective tax incentives available to businesses today.
Employers who participate in WOTC can expect: ✔ Improved hiring strategies by targeting diverse and underserved communities.
✔ Enhanced cash flow through annual tax savings.
✔ Regulatory compliance with minimal fraud risk due to strict oversight.
✔ Long-term tax benefits, even for businesses operating at a loss.
With the right strategy and automation, employers can ensure they capture every available tax credit while making a meaningful impact on their workforce.
Final Thoughts
The Work Opportunity Tax Credit (WOTC) remains one of the most underutilized yet highly effective tax incentives available to U.S. employers. By understanding the nuances, debunking misconceptions, and leveraging modern automation tools, businesses can unlock millions in potential tax savings while supporting employees who need it most.
As WOTC continues to evolve, now is the time for employers to take full advantage of the program—before it’s too late.