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Work Opportunity Tax Credit - Frequently Asked Questions and Answers

  1. What changes were made to the Work Opportunity Tax Credit?
    The American Taxpayer Relief Act of 2012 (the Act) extends the Work Opportunity Tax Credit (WOTC) for taxable employers hiring members of targeted groups before Jan.1, 2014, and for tax-exempt employers hiring qualified veterans before Jan. 1, 2014. In 2012, the WOTC was available for employers hiring qualified veterans, and not for hiring members of other targeted groups. Therefore, the Act retroactively extends the availability of the WOTC for taxable employers who hired individuals from targeted groups, other than qualified veterans, in 2012.

  2. Who is considered a qualified veteran?
    To be considered a veteran, the individual must:

    • Have served on active duty (not including training) in the U.S. Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability, and
    • Not have a period of active duty (not including training) of more than 90 days that ended during the 60-day period ending on the hiring date.

    In addition to the above the veteran is considered qualified for purposes of the credit if he or she is certified as:

    • A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a 3-month period ending during the 12-month period ending on the hiring date.
    • Unemployed for a period or periods totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
    • Unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
    • Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces.
    • Entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.

    See IRS Notice 2012-13 for more detailed information.

  3. Are tax-exempt organizations eligible for the Work Opportunity Tax Credit?
    Yes, qualified tax-exempt organizations may claim the Work Opportunity Tax Credit for hiring qualified veterans. The VOW to Hire Heroes Act of 2011 made the Work Opportunity Tax Credit available to qualified tax-exempt organizations who hire qualified veterans who begin work on or after Nov. 22, 2011, and before Jan. 1, 2013. The American Taxpayer Relief Act of 2012 now extends that timeframe through Dec. 31, 2013.

    The credit for qualified tax-exempt organizations is claimed as a credit against the employer’s share of social security tax on wages paid to all employees of the organization during the 1-year period beginning with the day the qualified veteran begins employment. However, see below Q/A for special rules that apply in claiming the credit for qualified tax-exempt organizations.

  4. Which tax-exempt organizations are qualified to claim the Work Opportunity Tax Credit for qualified veterans?
    For purposes of the credit, a qualified tax-exempt organization is an employer that is an organization described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a). An employer that is an agency or instrumentality of the federal government, or of a state, local or Indian tribal government, is not a qualified employer unless it is an organization described in Code section 501(c) that is exempt from tax under Code section 501(a).

  5. How does the Work Opportunity Tax Credit impact a business’ tax liability?
    Taxable employers claim the WOTC as a general business credit on Form 3800 against their income tax.  The WOTC is calculated using Form 5884.

    Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.

  6. Are there limitations on the credits?
    A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, General Business Credit, for more details.

    For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period in which the credit is claimed.

  7. How does an employer qualify for the credit?
    An employer must hire an employee who is certified as being a member of a targeted group (for tax-exempt organizations, the WOTC may only be claimed for qualified veterans) who begins work before Jan 1, 2014. An employer must obtain certification that an individual is a member of a targeted group in order to claim the credit. To obtain certification, an employer must:

    • Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to pre-screen and to make a written request to their State Workforce Agency to certify an individual as a member of a targeted group for purposes of qualifying for the WOTC. This form is not filed with the Internal Revenue Service; it is filed with the appropriate State Workforce Agency.
    • The state work opportunity tax credit coordinator for the State Workforce Agency must certify the job applicant is a member of a targeted group. For additional information, access the Department of Labor Employment and Training Administration (ETA) website.
  8. How do I determine the amount of the credit I can claim?
    Qualified tax-exempt organizations use Form 5884-C to determine the amount of the WOTC for qualified veterans. All other employers use Form 5884, Work Opportunity Credit, to determine the amount of the credit.

  9. How and when does a taxable employer claim the credit?
    After the employee is certified by the appropriate State Workforce Agency as a member of a targeted group, the taxable employer will use Form 5884 and Form 3800 to claim the credit when filing its business income tax return.

  10. How and when does a qualified tax-exempt organization claim the credit? 
    Once a veteran is certified as a qualified veteran by a State Workforce Agency and the veteran has worked at least 120 hours, the tax-exempt employer may file Form 5884-C to claim the credit. Form 5884-C is filed after the qualified tax-exempt organization has filed its employment tax return for the employment tax period for which the credit is claimed.

  11. Will the credit have any effect on what a qualified tax-exempt organization reports on its employment tax return?
    No. Because the credit is not claimed on a qualified tax-exempt organization’s employment tax return, the credit will not affect what is reported on the employment tax return.

  12. May a qualified tax-exempt organization reduce its employment tax deposits in anticipation of the credit?
    Because Form 5884-C will not be processed simultaneously with the qualified tax-exempt organization’s employment tax return, the IRS recommends that qualified tax-exempt organizations not reduce their required deposits in anticipation of any credit. A qualified tax-exempt organization that reduces its deposits in anticipation of the credit may receive a system-generated notice; however, the balance due, including any related penalties and interest, resulting from the reduction in deposits to reflect the credit, will be abated when the credit is applied, generally without any taxpayer action.

  13. What information will an employer need in order to calculate the credit?
    Besides the certification from the State Workforce Agency, you will need (note: starred items below will be found on the completed Form 8850):

    • The date the targeted group member began work for you*,
    • The criteria by which the employee qualifies you for the WOTC*,
    • The number of hours he or she has worked for you,
    • Employee's wages during the one-year period beginning on the date he or she began work for you (as of the date you are filing Form 5884 or Form 5884-C), and
    • For tax-exempt employers:
      • Information from the employment tax return for the period against which you are calculating the credit, and
      • Information from any previously filed Forms 5884-C.
  14. What is the amount of the credit an employer can claim for a qualified veteran?
    The credit can be as high as $9,600 per qualified veteran for taxable employers or up to $6,240 for qualified tax-exempt organizations, but the amount of the credit will depend on a number of factors, including the length of the veteran’s unemployment before hire, the number of hours the veteran works, the hire date of the veteran, and the veteran’s first-year wages. See Maximum Amount of Credit chart, below:

    Maximum Amount of Credit for Qualified Veterans

    (“First-year wages” refers to the wages you paid or incurred for work performed during the one-year period beginning on the date the individual begins work.)

    TAXABLE EMPLOYERS: Max Credit Amounts Only - See respective forms for calculation instructions

    Category of Qualified Veteran being hired by taxable employer before 1/1/14

    Worked at least 120 hours but less than 400 hours as of the date Form 5884 is filed

    Worked at least 400 hours as of the date Form 5884 is filed

    Veteran certified as being a member of a family receiving assistance under a supplemental nutrition assistance program under the Food and Nutrition Act of 2008 for at least a 3-month period ending during the 12-month period ending on the hiring date.

    Max Credit:

    25% of $6,000 of first-year wages (up to $1,500)

    Max Credit:

    40% of $6,000 of first-year wages (up to $2,400)

    Veteran certified as having aggregate periods of unemployment of at least 4 weeks but less than 6 months in the year prior to being hired

    Max Credit:

    25% of $6,000 of first-year wages (up to $1,500)

    Max Credit:

    40% of $6,000 of first-year wages (up to $2,400)

    Disabled veteran who is certified as having a hiring date which is not more than 1 year after discharge or release from active duty

    Max Credit:

    25% of $12,000 of first-year wages (up to $3,000)

    Max Credit:

    40% of $12,000 of first-year wages (up to $4,800)

    Veteran certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired

    Max Credit:

    25% of $14,000 of first-year wages (up to $3,500)

    Max Credit:

    40% of $14,000 of first-year wages (up to $5,600)

    Disabled veteran who is certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired

    Max Credit:

    25% of $24,000* of first-year wages (up to $6,000)

    * For veterans in this category hired before November 22, 2011, the max credit is 25% of $12,000 of first-year wages (up to $3,000)

    Max Credit:

    40% of $24,000* of first-year wages (up to $9,600)

    * For veterans in this category hired before November 22, 2011, the max credit is 40% of $12,000 of first-year wages (up to $4,800)

     

    QUALIFIED TAX-EXEMPT ORGANIZATIONS:  Max Credit Amounts Only - See respective forms for calculation instructions

    Category of Qualified Veteran being hired by qualified tax-exempt organization on or after 11/22/11 and before 1/1/14

    Worked at least 120 hours but less than 400 hours as of the date Form 5884-C is filed

    Worked at least 400 hours as of the date Form 5884-C is filed

    Veteran certified as being a member of a family receiving assistance under a supplemental nutrition assistance program under the Food and Nutrition Act of 2008 for at least a 3-month period ending during the 12-month period ending on the hiring date.

    Max Credit:

    16.25% of $6,000 of first-year wages (up to $975)

    Max Credit:

    26% of $6,000 of first-year wages (up to $1,560)

    Veteran certified as having aggregate periods of unemployment of at least 4 weeks but less than 6 months in the year prior to being hired

    Max Credit:

    16.25% of $6,000 of first-year wages (up to $975)

    Max Credit:

    26% of $6,000 of first-year wages (up to $1,560)

    Disabled veteran who is certified as having a hiring date which is not more than 1 year after discharge or release from active duty

    Max Credit:

    16.25% of $12,000 of first-year wages (up to $1,950)

    Max Credit:

    26% of $12,000 of first-year wages (up to $3,120)

    Veteran certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired

    Max Credit:

    16.25% of $14,000 of first-year wages (up to $2,275)

    Max Credit:

    26% of $14,000 of first-year wages (up to $3,640)

    Disabled veteran who is certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired

    Max Credit:

    16.25% of $24,000 of first-year wages (up to $3,900)

    Max Credit:

    26% of $24,000 of first-year wages (up to $6,240)

  15. How does a qualified tax-exempt employer know which rate applies when calculating the credit on Form 5884-C?
    The employer will determine the appropriate rate by totaling the number of hours worked by a qualified veteran for the employer from date of hire to the date Form 5884-C is filed. If during that period the employee worked at least 120 hours, but less than 400 hours, the 16.25% rate applies when calculating the credit on Form 5884-C. If the employee worked 400 hours or more during that period, the 26% applies when calculating the credit on Form 5884-C.

    While the appropriate rate is determined based on the number of hours worked between date of hire and the date Form 5884-C is filed, the credit claimed on Form 5884-C is based on qualified first-year wages paid between date of hire and the last day of the employment tax period (quarter or year) for which the credit is claimed on the Form 5884-C.

    Example 1:
    ABC Employer, a qualified tax-exempt organization hired a qualified veteran on February 6, 2012. As of May 1, 2012, ABC meets all the requirements to claim a credit for qualified first-year wages paid in the first quarter.

    ABC timely filed its 2012 first quarter Form 941. It files its Form 5884-C to claim a credit for the first quarter of 2012 on May 1, 2012. As of May 1 the qualified veteran has worked a total of 360 hours for ABC. Because the qualified veteran worked more than 120 hours but less than 400 hours between date of hire and May 1, 2012 (the date Form 5884-C is filed), ABC uses the 16.25% rate to calculate the credit on the qualified first-year wages paid to the qualified veteran from the date of hire through the end of the first quarter.

    Example 2:
    Same facts as in Example 1, except ABC Employer files Form 5884-C to claim a credit for the first quarter of 2012 on May 22, 2012, at which point the qualified veteran has worked 450 hours for the organization. Because the qualified veteran worked more than 400 hours between the date of hire and May 22, 2012 (the date Form 5884-C is filed), ABC Employer uses the 26% rate to calculate the credit on the qualified first-year wages paid to the qualified veteran from the date of hire through the end of the first quarter.

  16. May a tax-exempt employer file one Form 5884-C to claim the credit for multiple quarters, or must a separate form be filed for each quarter?
    A qualified tax-exempt organization may file one Form 5884-C to claim the credit for qualified first-year wages paid to qualified veterans over multiple quarters, or it can choose to file separate Forms 5884-C to claim the credit for qualified first-year wages paid to qualified veterans for each quarter. The organization will enter on line 3b the quarter for which the credit is being claimed. If filing one Form 5884-C to claim the credit for wages paid over multiple quarters, the organization should enter on line 3b the latest quarter during which qualified first-year wages were paid to qualified veterans.

    The amount of credit claimed on Form 5884-C that is refunded is limited to the amount of employer social security tax reported on the employment tax return for the period for which the credit is claimed (the period indicated on line 3b). Any credit not refunded because of this limit will be carried forward and included in the cumulative credit figured on a Form 5884-C filed for a subsequent quarter during which the organization pays qualified first-year wages to a qualified veteran.

    The examples below illustrate the options for claiming credits for qualified first-year wages paid over multiple quarters.  In Example 1, an employer files one Form 5884-C to claim the credit for qualified first-year wages paid to a qualified veteran in multiple quarters. In Example 2, an employer files separate Forms 5884-C for each quarter to claim the credit for qualified first-year wages it pays to a qualified veteran in multiple quarters.

    Example 1:
    XYZ Employer, a qualified tax-exempt organization, hires a qualified veteran on Feb. 6, 2012.  As of Oct. 31, 2012, XYZ meets all the requirements to claim a credit for qualified first-year wages paid for the first, second, and third quarters (between Feb. 6, 2012 (date of hire) and Sept. 30, 2012).

    XYZ timely filed its 2012 third quarter Form 941. It is filing its Form 5884-C on Oct. 31, 2012, to claim the credit for the first three quarters of 2012.  Because the qualified veteran has worked more than 400 hours between the date of hire and Oct. 31, 2012 (date Form 5884-C is filed), XYZ Employer uses the 26% rate to calculate the credit on qualified first-year wages paid from the date of hire through the end of the third quarter of 2012.

    XYZ will indicate on lines 3a and 3b that it is claiming the credit against the employer social security tax liability for the third quarter of 2012. Any credit in excess of that amount will be carried forward and included in the cumulative credit figured on a Form 5884-C filed for a subsequent quarter.

    Example 2:
    Same facts as in Example 1 except on Oct. 31, 2012, XYZ files a separate Form 5884-C for each of the first, second, and third quarters of 2012. As in Example 3, because the qualified veteran has worked more than 400 hours between date of hire and Oct. 31, 2012 (date Forms 5884-C are filed), XYZ uses the 26% rate to calculate the credit on qualified first-year wages paid during each quarter.

    On the Form 5884-C for first quarter 2012, XYZ will indicate on line 3b that it is claiming the credit against the employer social security tax liability for the first quarter of 2012. It will use the 26% rate to calculate the credit on qualified first-year wages paid in the first quarter.

    On the Form 5884-C for second quarter 2012, XYZ will indicate on line 3b that it is claiming the credit against the employer social security tax liability for the second quarter of 2012. It will use the 26% rate to calculate the credit on qualified first-year wages paid in the first and second quarters, but it will subtract on line 7 the credit claimed on line 11 of Form 5884-C for the first quarter.

    On the Form 5884-C for third quarter 2012, XYZ will indicate on line 3b that it is claiming the credit against the employer social security tax liability for the third quarter of 2012. It will use the 26% rate to calculate the credit on qualified first-year wages paid in the first, second, and third quarters, but it will subtract on line 7 the credit claimed on line 11 of Form 5884-C for the first and second quarters.

Page Last Reviewed or Updated: 14-Jan-2014