Labor & Employment Developments Blog

Overview

A long-standing federal hiring incentive is coming to an end in 2025. Unless extended by Congress, the Work Opportunity Tax Credit (“WOTC”), a program that has provided employers with a predictable tax credit for hiring individuals facing significant barriers to employment, will expire on December 31, 2025.[1] This credit has been part of many employers’ staffing, budgeting, and tax-planning strategies for nearly three decades. Its potential sunset will require employers to evaluate current practices and prepare for changes to their 2026 cost structures.

Background

Congress created the WOTC through the Small Business Job Protection Act of 1996 to incentivize employers to hire individuals who traditionally experience higher barriers to employment. Under the program, employers can claim a federal income tax credit for wages paid to members of a “targeted group.” The Internal Revenue Code of 1986, as amended, identifies groups such as veterans, ex-felons, designated community residents, qualified summer youth employees, and qualified long-term unemployment recipients.

For most eligible workers, the credit equals 40% of up to $6,000 in first-year wages, capping the annual credit at $2,400 per worker. Employers must file IRS Form 8850 within 28 days after the employee’s start date to secure eligibility.

The WOTC has been widely utilized by employers with large frontline or hourly workforces, creating regular opportunities to offset recruitment and training costs.

What Employers Need to Know

As of now, the statutory authority for the WOTC remains scheduled to expire on December 31, 2025. After that date, wages paid to otherwise eligible workers will no longer qualify for the credit unless Congress enacts an extension. On November 21, 2025, bipartisan legislation was introduced in an attempt to extending and modernizing the WOTC. However, it has not been passed yet.

Given the uncertainty, employers should audit existing WOTC practices to ensure timely filing and full utilization of the credit prior to its expiration. KMK’s Tax and Labor & Employment Teams will continue to track federal guidance and potential congressional action and provide updates as new information becomes available. In the meantime, employers should prepare for the possibility that this hiring incentive will soon come to an end

[1] Internal Revenue Service, Work Opportunity Tax Credit (last updated May 8, 2025), https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit.