If you are looking to hire new employees, consider taking advantage of the work opportunity tax credit. This incentive is meant to encourage you to hire individuals facing difficulties in finding employment. The credit has been extended until the end of 2025.
There are ten groups of individuals that qualify for this credit:
- People who receive Temporary Assistance for Needy Families.
- Veterans who are unemployed or disabled.
- Formerly incarcerated individuals.
- Residents of designated areas with economic challenges.
- Individuals referred through vocational rehabilitation programs.
- Youth employees who live in designated areas with economic challenges.
- People who receive Supplemental Nutrition Assistance Program benefits.
- Individuals who receive Supplemental Security Income.
- Families that have received long-term assistance.
- People who have been unemployed for a significant period of time.
To claim the credit, you will need to obtain certification that an individual belongs to one of these groups. They do so by submitting IRS Form 8850, called Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency within 28 days of the eligible worker starting employment. Remember, this form should not be sent to the IRS. If there are any questions about the form, contact your state workforce agency.
Once the certification is approved, you can claim the work opportunity credit on your federal income tax return. The amount is typically based on the wages paid to eligible workers during the first year of their employment. Calculate the credit using Form 5884 Work Opportunity Credit, and then claim it on Form 3800, called General Business Credit.
There is a special rule for tax-exempt organizations. Not for profits can only claim the credit for hiring qualified veterans who started working for them between 2020 and 2026. After receiving the Form 8850 certification, tax-exempt organizations can claim the credit against their payroll taxes using Form 5884-C, called Work Opportunity Credit for Qualified Tax Exempt Organizations.
There are limitations on the credit amounts. As a taxable business, the amount is limited to your income tax liability. Any remaining value can be carried back or forward according to the normal rules. For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax owed on wages paid to qualifying employees.
If you have any questions on how this credit applies to you, speak to your tax specialist.
