IRS Update Clarifies Prescreening Process of New Hires for Work Opportunity Tax Credit

Updated online information from the IRS on prescreening job applicants is intended to help determine if hiring them would enable an employer to receive the federal Work Opportunity Tax Credit (WOTC), which is available to employers that hire designated categories of workers who face significant barriers to employment.

For employers facing a tight job market, the WOTC may help by offsetting some of the compensation costs associated with a new hire. "Those having a hard time finding employees for basic tasks and labor may want to keep the WOTC in mind," tweeted online training firm Overnight Accountant following the announcement from the IRS on Sept. 19.

The WOTC was first created as part of the Small Business Job Protection Act of 1996 and has been extended on a regular basis. In 2021, Congress authorized an extension of the WOTC until Dec. 31, 2025.

Ten designated categories are determined to present significant barriers to employment:

• Qualified IV-A Temporary Assistance for Needy Families (TANF) recipients.
• Certain veterans, including unemployed or disabled veterans.
• People who were formerly incarcerated or previously convicted of a felony.
• 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.
• Qualified long-term unemployment recipients.

Clarifying the Prescreening Process

The online updates added to the IRS' WOTC webpage address the prescreening and certification process. To satisfy the requirement to prescreen a job applicant for eligibility to qualify an employer to receive the WOTC, on or before the day a job offer is made, a Form 8850: Pre-Screening Notice and Certification Request for the Work Opportunity Credit must be completed by the job applicant and the employer, the IRS said.
After prescreening a job applicant, the employer must then request certification by submitting Form 8850 to the appropriate state workforce agency no later than 28 days after the employee begins work. Other requirements and further details can be found in the Instructions for Form 8850.

Although the tax credit generally is not available to tax-exempt organizations, a special provision allows them to claim the WOTC against the employer's share of Social Security tax for hiring qualified veterans, the IRS noted. These organizations claim the credit on Form 5884-C: Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.

How the WOTC Works

About $1 billion in tax credits are claimed each year under the WOTC program, according to the U.S. Department of Labor. The credit is limited to the amount of business income tax liability or Social Security tax the employer owes.

According to frequently asked questions the IRS posted last year, the WOTC is equal to 40 percent of up to $6,000 of wages paid to, or incurred on behalf of, an individual who is in their first year of employment, is certified as being a member of a targeted group, and performs at least 400 hours of services for that employer. Thus, the maximum tax credit is generally $2,400.

For "qualified veterans," up to $24,000 in wages may be taken into account in determining the WOTC, for a maximum tax credit of $9,600. This higher wage base applies, for instance, for hiring a veteran who is a member of a family that received SNAP benefits (food stamps) for at least a 3-month period during the 15-month period ending on their hiring. It also applies for veterans entitled to compensation for a service-connected disability and unemployed for at least 6 months in the 1-year period ending on their hiring date, for example.

There is no limit on the number of individuals an employer can hire to qualify to claim the WOTC. An employer, however, cannot claim the WOTC for employees who are rehired.

Related SHRM Articles:

Work Opportunity Tax Credit Extended Through 2025, SHRM Online, February 2021

The Work Opportunity Tax Credit Can Help Close the Skills Gap, SHRM Online, October 2019