The American job market is a changing landscape these days. A year ago, the big push was to retain workers in the midst of the COVID-19 pandemic. Now the need is to find new workers to staff a growing economy.
To help do just that, the Internal Revenue Service points to the work opportunity tax credit, which was extended by recent legislation all the way through the end of 2025.
This tax credit isn’t new. It encourages employers to hire from any of 10 targeted groups who historically face big hurdles in finding jobs. These targeted groups are:
- Temporary Assistance for Needy Families recipients
- Qualified 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 recipients
- Supplemental Security Income recipients
- Long-term family assistance recipients
- Long-term unemployment recipients
The IRS says it shouldn’t be a surprise that long-term unemployment recipients are on the list, since millions of people were out of work at one time or another over the span of the pandemic.
How does an employer qualify for the credit?
An employer seeking to qualify for the work opportunity tax credit has to first request the certification from their state. They should submit IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit to their state workforce or employment agency. Do not submit this form to the IRS.
Employers usually have 28 days to submit Form 8850 to their state agency after the eligible new hire starts work. If the hire falls into one of two special categories, though, there’s an extension at play.
If the new employee is either a qualified summer youth employee living in an Empowerment Zone; or a designated community resident living in an Empowerment Zone, then the employer has until Nov. 8, 2021 to submit Form 8850 to the state. The new hires have to start work between January 1 and October 9 in order to qualify for the extended deadline.
How does an employer claim the work opportunity credit?
The work opportunity credit is claimed by the eligible employer when they file their federal income tax return.
The credit is calculated on Form 5884, Work Opportunity Credit, based generally on the wages paid to their eligible workers in their first year on the job.
Once calculated, the credit amount is claimed on Form 3800, General Business Credit.
It should be noted that tax-exempt organizations can only claim the work opportunity credit for hiring qualified veterans. These tax-exempt employers can use Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations, to claim the credit against payroll taxes. However, for these employers, the credit is limited to the amount of the business income tax liability or Social Security tax owed for tax-exempt organizations.