Tax credit can help employers hiring new workers

Written on May 06, 2018

With many businesses facing a tight job market, a valuable tax credit is available to employers for hiring long-term unemployment recipients and other categories of workers with employment barriers.

The Work Opportunity Tax Credit (WOTC) is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment. For any employer considering this option, the WOTC might help.

Legislation enacted in recent years has both expanded and modified the credit. For example, legislation effective Jan. 1, 2016, added a new category for long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and received state or federal unemployment benefits during part or all of that time.

The credit, usually claimed on Form 5884, Work Opportunity Credit, is generally based on wages paid to eligible workers during the first two years of employment. To qualify for the credit, an employer must first request certification by filing IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, with the state workforce agency within 28 days after the eligible worker begins work. Other requirements and further details can be found in the instructions to Form 8850.

There are now 10 categories of WOTC-eligible workers. Besides long-term unemployment recipients, the other categories include certain veterans and recipients of various kinds of public assistance, among others.

  1. Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
  2. Unemployed veterans, including disabled veterans
  3. Ex-felons
  4. Designated community residents living in Empowerment Zones or Rural Renewal Counties
  5. Vocational rehabilitation referrals
  6. Summer youth employees living in Empowerment Zones
  7. Food stamp (SNAP) recipients
  8. Supplemental Security Income (SSI) recipients
  9. Long-term family assistance recipients
  10. Qualified long-term unemployment recipients.

Eligible businesses claim the WOTC on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800, General Business Credit.

Though the credit is not available to tax-exempt organizations for most categories of new hires, a special rule allows them to get the WOTC for hiring qualified veterans. These organizations claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations Hiring Qualified Veterans. Visit the WOTC page on IRS.gov for more information.

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