For Small Business Week: Tax credit can help employers hiring new workers; key certification requirement applies

WASHINGTON —Adapted from IRS Newswire Issue IR-2018-113. With many businesses facing a tight job market, the Internal Revenue Service reminds employers to check out the Work Opportunity Tax Credit (WOTC), a valuable tax credit that encourages employers to hire designated categories of workers who face significant barriers to employment. Legislation enacted in recent years has both expanded and modified the credit.

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:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients
• Unemployed veterans, including disabled veterans
• Ex-felons
• Designated community residents living in Empowerment Zones or Rural Renewal Counties
• Vocational rehabilitation referrals
• Summer youth employees living in Empowerment Zones
• Food stamp (SNAP) recipients
• Supplemental Security Income (SSI) recipients
• Long-term family assistance recipients
• 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.

Although 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.