Question

On page 12-7 (Section 12-3b), the text notes that employers may earn a “work opportunity credit” for hiring members of target groups, such as veterans. If an Illinois employer is considering hiring a qualifying veteran, are there any procedures it must follow or any special documentation must it obtain and keep in order to demonstrate that the new employee is a qualifying veteran? Are there any special forms that must be used? If so, please describe the procedures, documentation or forms in detail.

Please answer each question in complete sentences, and cite name and number of the IRS publication or form/instruction where you found each answer, and the page number on which the answer is found. Use your own words in the answer – do not copy the IRS’ language.

Answer 1

The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment.

WOTC joins other workforce programs that incentivize workplace diversity and facilitate access to good jobs for American workers.

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) retroactively allows eligible employers to claim the Work Opportunity Tax Credit (WOTC) for all targeted group employee categories that were in effect prior to the enactment of the PATH Act, if the individual began or begins work for the employer after December 31, 2014 and before January 1, 2021. For tax-exempt employers, the PATH Act retroactively allows them to claim the WOTC for qualified veterans who begin work for the employer after December 31, 2014 and before January 1, 2021. The PATH Act also added a new targeted group category to include qualified long-term unemployment recipients.

Targeted Groups

Employers can hire eligible employees from the following target groups for WOTC.

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Qualified IV-A Recipient

Qualified Veteran

Ex-Felon

Designated Community Resident (DCR)

Vocational Rehabilitation Referral

Summer Youth Employee

Supplemental Nutrition Assistance Program (SNAP) Recipient

Supplemental Security Income (SSI) Recipient

Long-Term Family Assistance Recipient

Qualified Long-Term Unemployment Recipient

Pre-screening and Certification

An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work.

Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850.

Limitations on the Credits

The credit is limited to the amount of the business income tax liability or social security tax owed.

A taxable business may apply the credit against its business income tax liability, and the normal carry-back and carry-forward rules apply. See the instructions for Form 3800, General Business Credit, for more details.

For qualified tax-exempt organizations, the credit is limited to the amount of employer social security tax owed on wages paid to all employees for the period the credit is claimed.

Claiming the Credit

Qualified tax-exempt organizations will claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, as a credit against the employer’s share of Social Security tax. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return.

Taxable Employers

After the required certification is secured, taxable employers claim the tax credit as a general business credit on Form 3800 against their income tax by filing the following:

• Form 5884 (with instructions)
• Form 3800 (with instructions)
• Your business’s related income tax return and instructions (i.e., Forms 1040 or 1040-SR, 1041, 1120, etc.)

Tax-exempt Employers

Qualified tax-exempt organizations described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a), may claim the credit for qualified veterans who begin work on or after December 31, 2014, and before January 1, 2021.

After the required certification (Form 8850) is secured, tax-exempt employers claim the credit against the employer social security tax by separately filing Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

File Form 5884-C after filing the related employment tax return for the period that the credit is claimed. The IRS recommends that qualified tax-exempt employers do not reduce their required deposits in anticipation of any credit. The credit will not affect the employer’s Social Security tax liability reported on the organization’s employment tax return