Congress, in order to encourage employers to hire members of targeted groups, provided a tax credit to employers who hire members of these groups. This tax credit is the Work Opportunity Credit. The credit expired for most targeted groups in 2011. However, the VOW to Hire Heroes Act of 2011 extended the Work Opportunity Credit to qualified veterans who begin work before January 1, 2013.
The credit is 40% of qualified first year wages for certified veterans who work at least 400 hours, and 25% for certified veterans who work at least 120 hours but less than 400 hours. Qualified wages are limited to $12,000; however, qualified wages for veterans who were unemployed for at least six months in the prior year are limited to $14,000.If the veteran has a service connected disability and was unemployed for at least six months in the prior year, qualified wages are limited to $24,000.
The veteran must be certified. This is done by the employer filing Form 8850, Pre-Screening Notice & Certification Request for the Work Opportunity Credit, with the employer’s state workforce agency within 28 days after the eligible employee begins work.
Employers claim this credit as a general business credit against their income tax. For tax-exempt employers, the Work Opportunity Credit is claimed against the employer portion of Social Security taxes.
Example 1: John is an Iraq War veteran. ABC Corp hires John during 2012. During 2012, John works 1,500 hours at $20 per hour ($30,000 gross pay for 2012). Since John worked more than 400 hours, the Work Opportunity Credit equals 40% of his wages (up to the limit of $12,000). ABC Corp claims a credit of $4,800.
Example 2: Same as above, except John was unemployed for 7 months during 2011. Since John was unemployed for more than six months in the prior year, the ceiling on qualifying wages is increased to $14,000. The credit is now $5,600.
Example 3: Same as Example 2, except John was injured in Iraq. Since John has a service related injury and was unemployed for at least six months in the prior year, the ceiling on qualifying wages is increased to $24,000. The credit is now $9,600. $9,600 is the maximum Work Opportunity Credit possible.
Example 2: Same as above, except John only works 200 hours ($4,000). Since John worked between 120 and 400 hours, his credit equals 25% of his wages of $4,000. ABC Corp claims a credit of $1,000.
The Work Opportunity Credit targeted more groups in the past, but in 2012 it only applies to qualified veterans. It is possible Congress will extend the credit for these other groups. Groups that qualified for the credit in the past included:
- Qualified IV-A recipients
- Long term family assistance recipients
- Vocational rehabilitation referrals
- Summer youth employees
- Nutrition assistance recipients
- Social security income recipients
- Designated community residents
- Disconnected youths
These groups may qualify in the future. We’ll keep our eyes open.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.
Any tax advice contained in the body of this post was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Any information contained in this post does not fall under the guidelines of IRS Circular 230