Work Opportunity Tax Credit
The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2020. For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014 and before January 1, 2020. The PATH Act also added a new targeted group category to include qualified long-term unemployment recipients.
New Targeted Group – Qualified Long-Term Unemployment Recipient (Hired on or after January 1, 2016)
The PATH Act expanded the targeted groups of individuals to include qualified long-term unemployment recipients. A qualified long-term unemployment recipient is any individual who on the day before the individual begins work for the employer, or, if earlier, the day the individual completes Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, is in a period of unemployment that is (i) not less than 27 weeks and (ii) includes a period (which may be less than 27 weeks) in which the individual received unemployment compensation under State or Federal law.
Because the PATH Act extended the WOTC retroactively for 2015, members of targeted groups and employers need additional time to submit Form 8850. Notice 2016-22 provides employers that hire members of targeted groups additional time beyond the 28-day deadline for submitting Form 8850 to Designated Local Agencies (DLAs). According to Notice 2016-22, an employer will be considered having timely submitted Form 8850 for targeted groups (other than qualified long-term unemployment recipients) to the appropriate DLA if the employer submits the completed Form 8850 on or after January 1, 2015 and on or before May 31, 2016. The notice also provides employers that hire members of the new targeted group of qualified long-term unemployment recipients on or after January 1, 2016, and on or before May 31, 2016, additional time beyond the 28-day deadline for submitting Form 8850 to the appropriate DLA. An employer will be considered having timely submitted Form 8850 for this new targeted group to the appropriate DLA if the employer submits the completed Form 8850 no later than June 29, 2016. A timely request for certification does not eliminate the need for the employer to receive a certification before claiming the credit.
Notice 2016-40 expands and extends by three months the transition relief provided in Notice 2016-22 for meeting the 28-day deadline for submitting Form 8850 to the appropriate DLA. The notice provides that for individuals hired on or after January 1, 2015 (January 1, 2016, in the case of qualified long-term unemployment recipients) and on or before August 31, 2016, an employer will be considered to have satisfied the 28-day deadline if the employer submits the Form 8850 to the DLA no later than September 28, 2016.
Pre-screening and Certification
An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work (See Transitional Relief above).
Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.
Limitations on the credits
The credit is limited to the amount of the business income tax liability or social security tax owed.
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 the credit is claimed.
Claiming the Credit
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.
After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:
- Form 5884 (with instructions)
- Form 3800 (with instructions)
- Your business’s related income tax return and instructions (i.e., Forms 1040, 1041, 1120, etc.)
Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who begin work on or after December 31, 2014, and before January 1, 2020.
After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans (PDF).
File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.
A qualified veteran is a veteran certified as any of the following:
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first year of employment.
- Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period prior to the date of hire.
- Unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the one-year period ending on the date of hire.
- Entitled to compensation for a service-connected disability and hired not more than one 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 totaling at least six months (whether or not consecutive) in the one-year period that ended on the date of hire.
See IRS Notice 2012-13 for more detailed information.