Small Business Week Reminder: Work Opportunity Tax Credit can Help Employers Hiring New Workers; Key Certification Requirement Applies

The Internal Revenue Service today reminded employers planning to hire new workers that there’s a valuable tax credit available to those who hire long-term unemployment recipients and others certified by their state workforce agency. During National Small Business Week—April 30 to May 6—the IRS is highlighting tax benefits and resources designed to help new and existing small businesses.

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. The credit, usually claimed on Form 5884, 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 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. The newest category, added effective Jan. 1, 2016, is 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 other categories include certain veterans and recipients of various kinds of public assistance, among others.

The 10 categories are:

• 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.

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. Visit the WOTC page on IRS.gov for more information.