Within the last few years, we have all seen businesses constantly looking to hire more and more employees, but many are still struggling with the work force shortage. If you’re a business looking to hire, you should know about the Work Opportunity Tax Credit. This tax credit encourages employers to hire workers certified as members of any of ten groups facing barriers to employment.
The ten target groups are:
- 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
If an employer hires an individual from one of these groups, the credit calculation then depends on the hours worked by the employee in their first year. The employee needs to work at least 120 hours in the first year of employment for any credit to be calculated.
- If the employee works from 120 to 400 hours, the credit is calculated at 25% of wages, which is capped at between $3,000 and $24,000 depending on the target group
- If the employee works over 400 hours, the credit is calculated at 40% of wages, with the same applicable caps
To receive the credit, first the employer must hire the individual. The employer must get certification that a hired individual qualifies under one of the target groups. Employers submit IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency within 28 days after the eligible worker begins work to get certification. Employers should not submit this form to the IRS. They should contact their state workforce agency with any questions about the processing of Form 8850.
There are some rules and limitations to be aware of. If your business is a tax-exempt organization then you are only allowed to claim the credit if you are hiring qualified veterans who began to work for the organization between 2020 and 2026. For a taxable business, the credit you can use each year is limited to the business’ income tax liability. Any credit remaining above the income tax liability is subject to the normal carry-back and carry forward rules. For qualified tax-exempt organizations, the credit is limited to the amount of employer Social Security tax it owes on wages paid to qualifying employees.