Editorial · December 15, 2014
Work Opportunity Tax Credit: Hiring Rules and Forms
The work opportunity tax credit (WOTC) lowers an employer's federal tax bill for hiring people from certain groups, such as veterans. Right now it covers only workers who started on or before December 31, 2013, because Congress has not renewed it. On December 3 the House passed a bill that would extend it through 2014. The Department of Labor (DOL) tells employers to keep submitting WOTC applications to state workforce agencies, in case Congress renews the credit back to the day it expired.
How much the credit is worth
The credit is generally a share of a new hire's first-year wages. It is 25 percent for a worker who puts in at least 120 hours but fewer than 400, and 40 percent at 400 hours or more. For most groups only the first $6,000 of wages counts, so the top credit is $2,400. The top credit runs from $1,200 for summer youth to $9,600 for some veterans.
Which hires are covered
DOL lists eight target groups.
- Veterans, who have five ways to qualify (below).
- Members of families that received Temporary Assistance for Needy Families (TANF) benefits for set periods.
- People ages 18 to 39 in families that got food stamps for set periods.
- People ages 18 to 39 who live in a federally designated empowerment zone or rural renewal county.
- People with a disability referred by a state-approved rehab agency, a Ticket to Work network or Veterans Affairs.
- Ex-felons hired within a year of conviction or release from prison.
- People who got Supplemental Security Income (SSI) for a month that ended in the 60 days before the hire.
- Summer youth, ages 16 and 17, who live in an empowerment zone and work between May 1 and September 15.
Form 5884 says empowerment zone designations were set to expire at the end of 2013.
For veterans, DOL lists the top credit for each way in.
- A member of a family that got food stamps for a stretch of at least 3 months in the 15 months before the hire: $2,400.
- Unemployed at least 4 weeks but under 6 months: $2,400.
- Unemployed at least 6 months: $5,600.
- Entitled to compensation for a service-connected disability and hired within a year of leaving active duty: $4,800.
- Entitled to compensation for a service-connected disability and unemployed at least 6 months: $9,600.
Time out of work adds up over the year before the hire.
To count as a veteran for the credit, a person must pass two tests. First, the person needs more than 180 days of active duty, or a discharge or release for a service-connected disability. Second, the person cannot have had a stretch of active duty over 90 days that ended in the 60 days before the hire. Active duty does not include training.
Form 5884 says the credit is zero for any worker who logs under 120 hours, worked for you before, is your dependent or is related to you. It is also zero if half or less of the pay was for work in your trade or business.
A tax-exempt 501(c) organization can claim the credit only for veterans, and only against its share of Social Security tax. Its top credit is $6,240 per veteran.
Form 8850 and the 28-day deadline
Form 8850 asks your state workforce agency (SWA) to certify that a new hire belongs to a target group. You file it with the SWA and never with the Internal Revenue Service (IRS).
- The applicant fills in page 1 on or before the day you make the job offer.
- If you believe the applicant is in a target group, you fill in page 2.
- You and the applicant each sign the form before you file it.
- You file it with the SWA no later than the 28th calendar day after the person starts work.
Send DOL's ETA Form 9061, the Individual Characteristics Form, with Form 8850. If the applicant already holds a conditional certification from the SWA or another participating agency, send ETA Form 9062 instead.
The SWA must certify that the worker is in a target group before you can claim the credit. A taxable employer figures the credit on Form 5884 and claims it on Form 3800, the general business credit form. Partnerships and S corporations report it on Schedule K instead.
Where the credit stands now
DOL's WOTC page, updated December 3, still carries a status update. The update says that, at this time, DOL has no indication whether Congress may extend the program.
A DOL guidance letter dated January 2, 2014, told states to keep accepting and logging applications for hires made on or after January 1, 2014. It told them not to issue eligibility certifications unless the program is reauthorized. The letter says there is no guarantee that those new hires will be certified. Form 5884 for 2013 tells employers not to report wages on that form for employees who begin work after 2013 unless the credit is extended.
On December 3 the House passed H.R. 5771, the Tax Increase Prevention Act of 2014, by a vote of 378 to 46. Ways and Means Committee staff say the bill would extend the credit through 2014.
The most recent renewal came in the American Taxpayer Relief Act of 2012. For that renewal, an IRS transition rule covered hires made after December 31, 2011 (December 31, 2012 for veterans) and on or before March 31, 2013. Under that rule, the IRS treated Form 8850 as on time if the employer submitted it to the SWA by April 29, 2013.
What to do while Congress decides
As DOL advises, keep filing Form 8850 as usual and watch two dates.
- Have each applicant fill in page 1 of Form 8850 by the day you make the offer.
- Mark the 28th calendar day after each start date and file the signed Form 8850 with your SWA by then, with ETA Form 9061 or 9062.