Chances are you have business clients who are facing a tight job market, so now is a good time to remind your clients about the work opportunity tax credit. Recent legislation extended this credit through the end of 2025.
This long-standing tax benefit encourages employers to hire workers certified as members of any of 10 targeted groups facing barriers to employment:
- Temporary Assistance for Needy Families recipients
- Qualified unemployed veterans, including disabled veterans
- Formerly incarcerated individuals
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program recipients
- Supplemental Security Income recipients
- Long-term family assistance recipients
- Long-term unemployment recipients
To qualify for the credit, an employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency. Employers should not submit this form to the IRS.
Extended deadline for select groups
Normally, employers must submit Form 8850 to the state workforce agency within 28 days after the eligible person begins work. A special relief provision gives employers until Nov. 8, 2021 to submit the form to their state workforce agency if they hire people in two groups: qualified summer youth employees living in Empowerment Zones and designated community residents living in Empowerment Zones.
To qualify for this deadline, eligible employees must start work on or after Jan. 1, 2021, and before Oct. 9, 2021. Other requirements and details are available in Notice 2021-43 and the instructions for Form 8850.
Figuring and claiming the credit
Eligible businesses claim the work opportunity credit on their federal income tax return. It is generally based on wages paid to eligible workers during the first year of employment. They figure the credit on Form 5884, Work Opportunity Credit, and then claim the credit on Form 3800, General Business Credit.
A special rule allows tax-exempt organizations to claim the credit only for hiring qualified veterans. These organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations. The credit is limited to the amount of the business income tax liability or Social Security tax owed for tax-exempt organizations.