History and conventional wisdom tell us that small businesses will play a leading role in recovery from the economic recession. Business owners looking to ensure that they have the workforce they need to capitalize on the upswing may be able to take advantage of the Work Opportunity Credit, which was expanded in the stimulus package enacted in February.
The credit can reduce a business’s tax liability by up to $2,400 for each new employee hired from one of 11 targeted groups, including unemployed veterans and “disconnected youth” hired after Dec. 31, 2008. To claim the credit, the employer needs a certification from the state employment security agency that the employee is a member of one of the designated groups. Hiring youth in some areas for any 90-day period between May 1 and September 15 can qualify the employer for a $1,200 credit.
The allowable credit is 40 percent of up to $6,000 of the employee’s first-year wages ($3,000 for summer youth jobs). For some disabled veterans, the credit can be up to $4,800 (40 percent of the first $12,000 of wages). Employers who hire a long-term family assistance recipient can claim a credit of up to $9,000, covering $10,000 in first-year wages at 40 percent and $10,000 in second-year wages at 50 percent.
The credit covers new hires from the following targeted groups:
- Long-term family assistance recipients are members of families that have received Temporary Assistance for Needy Families (TANF) for the 18 months immediately preceding the employee’s first day of work, or that stopped receiving TANF during the two previous years after receiving payments for the maximum period allowed by state or federal law. Employers who hire members of these families are eligible for the $9,000, two-year credit. Members of TANF families that have received assistance for nine of the 18 months immediately preceding the employee’s first day of work are eligible for a credit of up to $2,400.
- “Designated community” residents between the ages of 18 and 39 are in a targeted group if they live in a designated Enterprise Community or Renewal Community. Summer employees who are 16 or 17 years old and live in these designated communities are eligible for the $1,200 credit. Summer youth employees must not have worked for the business claiming the credit at any previous time.
- Food-stamp recipients are in a targeted group if they are between 18 and 39 years old and their families have received foods stamps for the six months preceding hire, or for three of the five previous months.
- Veterans whose families have received food stamps for three of the past 15 months are in a targeted group, as are those who were are entitled to compensation for a service-related disability and were either discharged in the last year or unemployed for six months of the last year. The new provision covering unemployed veterans applies to individuals who have served on active duty for more than 180 days or been discharged with a service-connected disability. They must have been released from active duty no more than five years before the hiring date and received unemployment compensation for at least four weeks during the previous year.
- Ex-felons who are hired within a year of conviction or release from prison are in a targeted group.
- Vocational rehabilitation referrals who are referred to the business by a state or veterans’ rehabilitative program can be qualified if they have a physical or mental disability that constitutes a substantial handicap to their employment.
- “Disconnected youth” are covered by a new provision that applies to individuals between the ages of 16 and 25 who have not attended school or worked regularly during the six months before hire and lack a “sufficient number of basic skills” needed for employment.
Some Rules and Limitations
As always with tax provisions, there are rules and limitations to heed, including some intended to prevent “double-dipping.” For example, employers must reduce the amount of wages they claim as a business expense by the amount claimed for the Work Opportunity Credit. If an employee qualifies for more than one credit, the employer must choose which one to apply. And, if the employer receives other federal payments that help defray the cost of the employee’s wages, such as funds for on-the-job training or supplemental security income (SSI) payments, the amount received doesn’t count as wages for purposes of the Work Opportunity Credit.
The credit is not allowed for hiring children or grandchildren, siblings, parents/ancestors and their siblings/offspring, whether blood relations or by marriage. If the employer is a corporation, the credit is not allowed for people related in any of these ways to anyone who owns more than 50% of the corporation’s stock. If the employer is an estate or trust, the credit can’t be claimed for grantors, beneficiaries, or fiduciaries of the trust or any of their relations.
The full credit can be claimed only if the employee performs at least 400 hours of paid service for the employer. If the employee performs between 120 and 400 hours, the credit is limited to 25 percent of the qualified first-year wages. No credit is allowed if the employee works for fewer than 120 hours. In addition, there are safeguards in the regulations to keep employers from claiming the credit for work the employee performs for another organization that is not eligible to receive it, such as non-profit organizations or companies that don’t have sufficient tax liability to make use of it.
In order to claim the credit, the employer needs to obtain from the state employment security agency (SESA) a certification that the employee is a member of a targeted group. This can be done on or before the day the employee starts work, or by written request to the SESA submitted within 28 days of the employee’s first day of work. This “pre-screening notice” is submitted on Form 8850. The credit is claimed on Form 5448, filed with the business’s or owner’s tax return.