Tax Tip 2023-62: The Work Opportunity Tax Credit helps businesses that hire from eligible groups

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IRS Tax Tips May 4, 2023

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Issue Number:  Tax Tip 2023-62

The Work Opportunity Tax Credit helps businesses that hire from eligible groups

Finding work can be a hard for anybody and certain groups face even bigger challenges. The Work Opportunity Tax Credit is extended through the end of 2025 to help employers that hire workers certified as members of these groups that face barriers to employment:

  • People who receive:
    • Long-term family assistance
    • Long-term unemployment
    • Supplemental Nutrition Assistance Program benefits
    • Supplemental Security Income
    • Temporary Assistance for Needy Families
  • Formerly incarcerated individuals
  • Qualified unemployed veterans, including disabled veterans
  • Designated community residents living in Empowerment Zones or Rural Renewal Counties
  • People referred to vocational rehabilitation programs
  • Summer youth employees living in Empowerment Zones

Certification requirement
To claim the credit, an employer must first get certification that an individual is eligible. To do this, the employer submits 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. Employers should not submit this form to the IRS. They should contact their state workforce agency with questions about processing Form 8850.

Figuring and claiming the credit
Eligible businesses claim the Work Opportunity Tax Credit on their federal income tax return. It’s generally based on wages paid to eligible workers during the first year of employment. After the employer receives the Form 8850 certification from the state workforce agency, they can:

Special rule for tax-exempt organizations
A special rule allows tax-exempt organizations to claim the credit only for hiring qualified veterans who began work for the organization before 2026. After the employer receives the Form 8850 certification from the state workforce agency, these organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations. IRS recommends that qualified tax-exempt employers don’t reduce their required deposits as they wait for the tax credit.

Limitations on the credits
For a taxable business, the credit is limited to the business' income tax liability. Unused credit is subject to the normal carry-back and carry forward rules. For qualified tax-exempt organizations, the credit is limited to the amount of the employer’s share of Social Security tax it owes on wages it paid to qualifying employees.

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