Companies that hire people with felony records can claim tax credits of up to $2,400 per qualifying employee under the federal Work Opportunity Tax Credit, and can get free fidelity bond coverage through the Federal Bonding Program to remove the insurance obstacle that often blocks these hires. The WOTC is authorized under Internal Revenue Code Section 51 for workers who began employment on or before December 31, 2025.1Internal Revenue Service. Work Opportunity Tax Credit Congress has renewed the credit several times since it was created, so an extension into 2026 is possible but not guaranteed. The Federal Bonding Program continues regardless.
What the WOTC Pays
The credit equals 40% of the first $6,000 in qualified wages paid during the employee’s first year, for a maximum of $2,400 per hire.2Office of the Law Revision Counsel. 26 USC 51 – Amount of Credit Because it’s a credit rather than a deduction, it reduces your federal tax bill dollar for dollar.
The full 40% rate kicks in only if the employee works at least 400 hours. Between 120 and 399 hours, the rate drops to 25% of qualifying wages, capping the credit at $1,500. Under 120 hours, you get nothing.2Office of the Law Revision Counsel. 26 USC 51 – Amount of Credit
One offset to keep in mind: if you claim the credit, you have to reduce your deduction for salaries and wages by the credit amount. The net benefit is smaller than the headline number, but still meaningful for most employers.
Who Counts as a Qualified Ex-Felon
Timing matters. Under Section 51, a qualified ex-felon is someone hired within one year of either the conviction date or release from prison, whichever comes later.2Office of the Law Revision Counsel. 26 USC 51 – Amount of Credit The conviction can be under any federal or state law. Hire someone more than a year past both dates and this target group no longer applies.
Certain hires are excluded even when the timing works. You can’t claim the credit for a relative of the business owner or, in a corporation, a relative of anyone owning more than 50% of the stock. Rehired former employees also don’t count.2Office of the Law Revision Counsel. 26 USC 51 – Amount of Credit
The ex-felon provisions are effectively closed to nonprofits. Tax-exempt organizations under IRC 501(c) can use the WOTC only for qualified veterans, and only against payroll taxes. Hiring a qualified ex-felon at a nonprofit produces no WOTC.1Internal Revenue Service. Work Opportunity Tax Credit
Current Authorization
The WOTC as written covers wages paid to qualifying individuals who began work on or before December 31, 2025. If you had a qualifying hire in 2025 or earlier and haven’t yet claimed the credit, unused amounts can be carried back one year or forward up to 20.1Internal Revenue Service. Work Opportunity Tax Credit For hires after that date, watch IRS.gov for word on whether Congress extends the program.
How to Claim the Credit
The paperwork happens in two stages. Miss the first one and the credit is gone, no matter how good the hire.
Within 28 Days of the Start Date
On or before the day the employee starts, have them help you complete IRS Form 8850, the Pre-Screening Notice and Certification Request.3Internal Revenue Service. About Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit The applicant checks the boxes for their target group and signs; you fill in your EIN and the start date. Alongside Form 8850, submit ETA Form 9061, or ETA Form 9062 if the applicant already has a conditional certification from a participating agency.4U.S. Department of Labor. How to File a WOTC Certification Request
Send both forms to your State Workforce Agency, not the IRS. The deadline is 28 calendar days after the employee’s start date.4U.S. Department of Labor. How to File a WOTC Certification Request Blow that window and the credit is forfeited for that hire, with limited exceptions for federally declared disasters.5Internal Revenue Service. Instructions for Form 8850 Put it in your onboarding checklist.
The State Workforce Agency reviews the submission and, if the employee qualifies, mails a certification letter. Turnaround runs from a few weeks to a few months. Keep the letter; you’ll need it for your return.
At Tax Filing
When you file your annual federal return, calculate the credit on Form 5884.6Internal Revenue Service. About Form 5884, Work Opportunity Credit The amount flows onto Form 3800, the General Business Credit, which attaches to your return.7Internal Revenue Service. About Form 3800, General Business Credit
Free Fidelity Bonds Through the Federal Bonding Program
Many applicants with felony histories can’t be bonded through commercial insurers, which stops some employers from placing them in roles that involve cash, inventory, or valuable property. The Federal Bonding Program, run by the Department of Labor, fills that gap with free fidelity bonds for at-risk hires, including people with felony convictions, people on parole or probation, and those in recovery from substance abuse.8U.S. Department of Labor. US Department of Labor Awards $725K to Help At-Risk Workers Overcome Barriers to Employment
The standard bond covers $5,000 with no deductible for six months from the start date.8U.S. Department of Labor. US Department of Labor Awards $725K to Help At-Risk Workers Overcome Barriers to Employment For higher-exposure roles, coverage can be issued in $5,000 increments up to $25,000 per individual with a reasonable justification. After six months, you can buy a continuation bond on the commercial market.
Either you or the applicant can start the request, but a real job offer with a start date has to be in place first. Contact your state’s bonding coordinator through the local American Job Center or State Workforce Agency. Once approved, the underwriter mails the bond directly to your business and coverage begins on the employee’s start date. The program pays for everything.
State and Local Add-Ons
Many states and cities layer their own incentives on top of the federal ones: supplemental tax credits, training grants, and partial wage reimbursements during the first months of employment. Some states also run bonding programs that extend beyond the federal coverage. Terms and eligibility change often. Your local American Job Center or State Workforce Agency can tell you what’s currently active in your area.
Legal Guardrails When Screening Applicants
The incentives don’t override the rules governing how you use criminal history in hiring. Getting the credit right while getting the hiring process wrong can produce liability that dwarfs the tax savings.
Title VII
The Equal Employment Opportunity Commission has taken the position that blanket rejection of applicants with felony records can violate Title VII of the Civil Rights Act where it disproportionately excludes candidates on the basis of race or national origin. The EEOC’s enforcement guidance recommends individualized assessment weighing three factors: the nature and seriousness of the offense, the time since the offense or completion of sentence, and the nature of the job.9U.S. Equal Employment Opportunity Commission. Enforcement Guidance on the Consideration of Arrest and Conviction Records in Employment Decisions Under Title VII of the Civil Rights Act
Background Checks Under the FCRA
If a third-party service runs the background check, the Fair Credit Reporting Act applies. You must give the applicant a standalone written notice that a consumer report may be used in the hiring decision and get their written permission before ordering it. If you decide against the applicant based on what the report shows, FCRA requires a pre-adverse-action notice with a copy of the report and a summary of rights, then a post-adverse-action notice identifying the reporting company and the applicant’s right to dispute.10Federal Trade Commission. Using Consumer Reports: What Employers Need to Know
Ban-the-Box and Fair Chance Laws
The federal Fair Chance to Compete for Jobs Act bars federal agencies from asking about criminal history before a conditional offer.11U.S. Department of Health and Human Services Office of Inspector General. The Fair Chance to Compete for Jobs Act It doesn’t reach private employers, but roughly 37 states and over 150 cities and counties have their own fair chance or ban-the-box laws. Coverage varies. Some apply only to public jobs, others reach private employers above a size threshold. Check your state and local rules before putting a criminal history question on your application form.