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The IRS has issued guidance on the work opportunity tax credit (WOTC), addressing the two new categories of employees whose hiring can make employers eligible for the credit, the expansion of eligibility for the credit to tax-exempt employers, and alternative filing methods.

IRS Expands Work Opportunity Tax Credit

  • 2/15/2012

IRS Expands Work Opportunity Tax Credit

The IRS has issued guidance on the work opportunity tax credit (WOTC), addressing the two new categories of employees whose hiring can make employers eligible for the credit, the expansion of eligibility for the credit to tax-exempt employers, and alternative filing methods.

Under Code Sec. 51, employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit. Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work. The credit applies in the case of qualified veterans who begin work prior to 2013 (members of other targeted groups had to begin work prior 2012).

Two new categories exist within the qualified veteran targeted group: veterans with aggregate unemployment during the year before hiring of between four weeks and six months, and those with unemployment of six months or more.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after Nov. 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised Form 8850 to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit.

Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit. These organizations must use Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans, to claim the credit. This form is filed separately and should not be attached to any other return filed by the exempt organization.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

Employers are permitted to submit Form 8850 electronically. The new guidance allows employers two alternative methods of certification using electronic signatures, in addition to the electronic submission of the form.

First, the employer may print out a copy of the electronically signed Form 8850 and send that copy to the agency by mail or fax. Second, the applicant may sign electronically while the employer signs in ink, and then sends the paper copy to the agency by mail or fax. Under this second method, a number of requirements must be met by the employer.

In addition to these two methods using electronic signatures, the IRS will allow fax transmission of the applicant and employer signatures if the agency accepts faxes and if certain other requirements are met.

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