Work Opportunity Credit

Extended & Expanded: Tax Credit for Employers Hiring Certain Employees

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The Work Opportunity Tax Credit is available for a portion of first-year wages paid to certain qualifying employees who begin work during 2013.  The credit is available for employers who hire members of the following targeted groups:

  • Veterans
  • Ex-felons
  • Long term family assistance recipients
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Nutrition assistance recipients
  • Social security income recipients
  • Designated community residents
  • Qualified IV-A recipients

This tax credit existed during 2012, but it was only available to employers hiring veterans (although in prior years it was available for all of the above targeted employees).  The American Taxpayer Relief Act of 2012 extended the tax credit for the all of the above employees who begin work during 2013.

The credit is 40% of qualified first-year wages for certified workers who work at least 400 hours, and 25% for certified workers who work at least 120 hours, but less than 400 hours.  These employees must be certified by designated local agencies, either in advance or immediately after employment begins.  IRS Form 8850 guides employers through the certification process.

Qualified first-year wages are limited to:

  • $6,000 for any targeted employee
  • $14,000 for a veteran who was unemployed for at least six months within one year prior to the hire date
  • $12,000 for a veteran entitled to compensation for a service-connected disability with a hire date within one year after having been discharged or released from active duty in the U.S Armed Forces
  • $24,000 for a veteran entitled to compensation for a service-connected disability who is unemployed for at least six months within one year prior to the hire date
  • $3,000 for a summer youth employee for wages paid during any 90 day period between May 1 and September 15

Each of the targeted employee groups above must meet eligibility requirements.

In the following examples, assume the employee worked at least 400 hours during the year and the employer is therefore eligible for the full 40% credit.

Example:  ABC Corp hires Joan, a qualifying ex-felon on October 1, 2013.  Joan earns $25,000 in wages during her first year of work.  ABC Corp is eligible for a tax credit of $2,400 (40% times the maximum qualifying wages of $6,000).

Example 2: XYZ Corp hires Jane, a qualifying veteran who has been unemployed for six months immediately prior to the hire date.  Jane earns $20,000 during her first year.  XYZ Corp is eligible for a tax credit of $5,600 (40% times the maximum qualifying wages of $14,000 for a veteran who was unemployed for at least 6 months during the year prior to the hire date).

Example 3: Tim is a qualifying veteran who is receiving compensation for a service-related disability.  Tim is hired by MNO Corp and is paid $30,000 in wages.  Tim had been unemployed for 8 months immediately prior to the hire date.  MNO Corp is eligible for a $9,600 credit (40% times the maximum qualifying wages of $24,000 for a veteran who is disabled and unemployed for at least 6 months during the year prior to the hire date.)

 

 

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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.

Tax Credit for Hiring Veterans

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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
  • Ex-felons
  • 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

 

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