The work opportunity tax credit is a federal tax credit intended to encourage employers to hire workers from certain targeted groups. The credit had expired at the end of 2014, but was retroactively reinstated by the Protecting Americans from Tax Hikes (PATH) Act. The credit, which can provide significant tax savings for hiring certain workers, applies through 2019.
Overview of the credit
For purposes of the credit, the tax law lists various targeted groups (which are explained in the instructions to Form 8850):
- Member of a family receiving Temporary Assistance for Needy Families (TANF)
- Qualified veteran (there are 5 subcategories)
- Qualified ex-felon
- Designed community resident
- Vocational rehabilitation referral
- Summer youth employee
- Recipient of SNAP benefits (food stamps)
- SSI recipient
- Long-term family assistance recipient
Starting in 2016, there is a new category for the long-term unemployed. This is a person who has been unemployed for at least 27 consecutive weeks and received government unemployment benefits.
The amount of the credit varies with the targeted group category and, in some cases, the term of employment. The basic credit amount is 40% of first year wages up to $6,000, for a top credit of $2,400. This basic amount applies for those who work at least 400 hours. Those who are retained on the job for at least 120 hours but not more than 400 hours, the credit percentage drops to 25%, for a top credit of $1,500. However, the credit for summer youth is limited to 40% of wages up to $3,000, for a top credit of $1,200. And the credit for veterans with service-connected disability who is employed for at least 6 months is 40% of wages up to $24,000, for a top credit of $9,600. There is no limit on the number of employees that can be hired to generate the work opportunity credit.
To ensure that a worker falls within a group, the worker must sign IRS Form 8850 and you, as the employer, must submit it to your state workforce agency (also referred to as the designated local agency, or DLA) within 28 days of the first day of employment. Even if a worker is part of a targeted group, no credit is allowed without the timely submission of the form.
An employer is also required to submit a Department of Labor (DOL)’s Employment and Training Administration (ETA) Form 9061 (Individual Characteristics Form) or 9062 (Conditional Certification) to the state workforce agency. The ETA form is used together with IRS Form 8850 to help state workforce agencies determine eligibility for the credit. Instructions to the form list the type of documentary evidence to be reviewed in order to complete the form (e.g., correction institution records for a new employee claiming to be an ex-felon).
The forms can be completed by the employee or on behalf of the new employee by an employer. Employers must submit the IRS and DOL forms together to the state workforce agency.
Hiring in 2015
Because the PATH Act didn’t become law until December 18, 2015, the IRS has granted transitional relief for submitting Form 8850 to the state workforce agency. The relief applies as well to the ETA’s Forms 9061 and 9062. For anyone hired in 2015, the form must be submitted by June 29, 2016.
Hiring in 2016 and beyond
As noted earlier, there is a new targeted group starting in 2016 for the long-term unemployed. Because the IRS has yet to update its form, employers who hire anyone from this targeted group between January 1, 2016, and May 31, 2016, also have until June 29, 2016, to submit Form 8850 to the state workforce agency. The relief applies as well to the ETA’s Forms 9061 and 9062.
For anyone who begins work on or after June 1, 2016, the usual 28-day submission period applies. There is no additional relief in this situation.
Best business practices
As an employer, you may not know whether a new worker is part of a targeted group. It’s advisable to have all new employees sign IRS Form 8850 and ETA Form 9061 or 9062 when they are completing their other paperwork (Form W-4 for income tax withholding; Form I-9 for verifying eligibility to work in the U.S.).
State tax credits
Some states may have their own work opportunity programs. For example, Texas offers a tax refund up to $2,000 for employers of TANF or Medicaid recipients. Georgia has a jobs tax credit up to $4,000 for each new job created (depending on location within the state).
If you plan to hire new workers this year, make sure that your HR department or the person handling HR responsibilities in your company see that the necessary paperwork is completed and filed so you can take a credit if eligible for it.