The Protecting Americans from Tax Hikes (PATH) Act, which was signed into law on December 18, 2015, extends permanently or temporarily many business-related tax rules. In this blog, I focus on the work opportunity tax credit for hiring certain workers.
Overview of the credit
The work opportunity credit is designed to encourage employers to hire workers from certain targeted groups.
These groups include:
- Qualified IV — A recipient, who is a member of a family receiving assistance under a state plan related to Temporary Assistance to the Needy
- Qualified veteran. There are five categories for a qualified veteran.
- Qualified ex-felon.
- Designated community resident, who is someone at least 18 years old but under 40 who lives in an empowerment zone or rural renewal community.
- Vocational rehabilitation referral.
- Summer youth employee.
- Recipient of SNAP benefits (food stamps).
- SSI recipient.
- Long-term family assistance recipient.
Different credit amounts apply to different targeted groups.
The credit was introduced in 1996, and has expired and been extended several times since then. It last expired at the end of 2014, but has been extended for five years (through 2019).
In order to claim the credit, you must submit Form 8850 to your state workforce agency to ask that the worker be certified as belonging to a targeted group. The employee indicates to which group he or she belongs, and then signs the form. The employer completes a section, and then signs the form. The submission must be done within 28 days of the employee’s first day on the job.
New targeted group
Beginning this year (and through 2019), there is a 10th targeted group: a long-term unemployed person. This is an individual who has been unemployed for at least 27 weeks. This includes a period in which the individual was receiving unemployment compensation. Wages paid to someone in this new targeted group, which are taken into account for the credit, are the first $6,000 of wages. The credit rate is 40%, so the maximum credit for hiring a long-term unemployed individual is $2,400 (40% of $6,000).
When you hire a new employee, be sure to have the person complete all necessary employment forms, including:
- Form I-9 to ensure that the person is legally eligible to work in the U.S. The form is not submitted to the government but is retained with your records.
- Form W-4 to determine income tax withholding parameters. This form is also not submitted to the IRS but you may be required to send a copy to your state. Be sure to retain the form for your records.
- Form 8850 to signify whether the worker belongs to a targeted group. As noted earlier this form is submitted to the state workforce agency.
You may also want the employee to sign a nondisclosure agreement to keep company secrets confidential. Review your hiring practices to make sure you comply with federal and state law, and that you have the paperwork to qualify for the work opportunity credit where applicable.