Tax credit for hiring the long-term unemployed

It”™s been a red flag when a job applicant has been out of work for a long time. However, that stigma may no longer be valid. In this era of pandemics, there are good reasons for someone to have been out of the labor force for an extended period.

And there are valuable tax credits for hiring the long-term unemployed and other groups facing significant barriers to employment.

Background

Legislation recently enacted extended the Work Opportunity Tax Credit (WOTC) through the end of 2025. This long-standing tax benefit encourages employers to hire workers certified as members of any of ten targeted groups facing barriers to employment.

Millions of Americans have been out of work at one time or another since the pandemic began, but one of these targeted groups is long-term unemployment recipients who have been unemployed for at least 27 consecutive weeks and have received state or federal unemployment benefits during part or all of that time.

Eligible employees

The other groups include certain veterans and recipients of various kinds of public assistance, among others. Specifically, the 10 groups are:

• Temporary Assistance for Needy Families (TANF) recipients,
• Unemployed veterans, including disabled veterans,
• Formerly incarcerated individuals,
• Designated community residents living in Empowerment Zones or Rural Renewal Counties,
• Vocational rehabilitation referrals,
• Summer youth employees living in Empowerment Zones,
• Supplemental Nutrition Assistance Program (SNAP) recipients,
• Supplemental Security Income (SSI) recipients,
• Long-term family assistance recipients,
• Long-term unemployment recipients.

Qualifying for the credit

To qualify for the credit, an employer must first request certification by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to their state workforce agency (SWA). Do not submit this form to the IRS.

Form 8850 must be submitted to the SWA within 28 days after the eligible worker begins work. Eligible businesses claim the WOTC on their federal income tax return. It is generally based on wages paid to eligible workers during the first year of employment. The credit is first figured on Form 5884, Work Opportunity Credit, and then is claimed on Form 3800, General Business Credit.

Though the credit is not available to tax-exempt organizations for most groups of new hires, a special rule allows them to claim the WOTC for hiring qualified veterans. These organizations claim the credit against payroll taxes on Form 5884-C, Work Opportunity Credit for Qualified Tax Exempt Organizations.

This column is for information only and should not be considered advice. If you’re a business owner who wants to take advantage of this tax-saving credit, but aren’t sure you qualify, contact your tax advisor.

Norm Grill, CPA, is managing partner of Grill & Partners, LLC certified public accountants and consultants to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien.