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How to Secure a Valuable Tax Credit for Hiring Designated Workers

May 30th 2017
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Before you interview the next group of job candidates for your small business, whether it’s to fill a full-time position or just for the summer, keep in mind that long-term unemployment recipients and other workers certified by a state agency may qualify for the Work Opportunity Tax Credit (WOTC).

This isn’t just chicken feed: The credit is generally equal to 40 percent of the worker’s first-year wages up to $6,000, for a maximum credit of $2,400 per worker. For disabled veterans, the credit may be available for the first $24,000 of wages, for a maximum credit of $9,600 per worker. And remember that tax credits, as opposed to tax deductions, offset tax liability on a dollar-for-dollar basis.

The WOTC is a long-standing income tax benefit that encourages employers to hire designated categories of workers who face significant barriers to employment.

This credit is usually claimed on Form 5884, Work Opportunity Credit. However, to qualify for the credit, an employer must first request certification by filing Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with the state workforce agency within 28 days after the eligible employee begins work. Other requirements and further details can be found in the instructions to Form 8850.

Currently, there are 10 categories of WOTC-eligible workers. The latest category to be added, effective Jan. 1, 2016, covers long-term unemployment recipients who had been unemployed for a period of at least 27 weeks and have received state or federal unemployment benefits during part or all of that time.

According to the IRS, 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 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 recipients
  • Supplemental Security Income recipients
  • Long-term family assistance recipients
  • Qualified long-term unemployment recipients

Note that a special summertime credit is available for hiring youths who are 16 or 17 years old and reside in an empowerment zone or enterprise community. This credit equals 40 percent of the first-year wages of $3,000, up to a maximum of $1,200, for a youth working at least 400 hours. But the credit is limited to wages paid for services performed between May 1 and Sept. 15.

Eligible businesses claim the WOTC on their income tax return. First, the credit is calculated on Form 5884, and then it becomes a part of the general business credit claimed on Form 3800.

These rules are complex, so small business owners may require guidance from their professional tax advisor.

Replies (2)

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By taxcreditguy12
May 31st 2017 13:47 EDT

Mr. Berry,

With the Empowerment Zones expiring on December 31, 2016 are the two categories (Designated community residents living in empowerment zones and Summer youth employees living in empowerment zones) still applicable?

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Replying to taxcreditguy12:
Jason Bramwell
By Jason Bramwell
Jun 6th 2017 10:00 EDT

Hi taxcreditguy12,
Sorry for the late response. Ken asked me to answer on his behalf. Ken said you are correct, that the empowerment zones have not been extended, even though the IRS listed the category of summer youth employees in the reminder it issued during National Small Business Week. That reminder/press release is linked in Ken's article. So we believe that it is still applicable.

The IRS will likely issue additional guidance for claiming the credit if this category is extended for 2017, as expected.

Thanks for your question!

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