LAST REVIEWED Apr 03 2019 9 MIN READ
By Cyndia Zwahlen
Widen the net your business throws when looking for new employees and you might qualify for tax credits worth hundreds, or even thousands, of dollars. A diverse workforce is a great thing to aim for regardless, but it certainly helps to know that the governemnt will financially incentivize you to do so. If you hire a person in one of the groups identified by the federal government as facing high barriers to employment, you can earn tax credits for part of their first year wages under the Work Opportunity Tax Credit program.
The maximum credit is $1,200 to $9,600, depending on the person you hire and how many hours are worked in that first year. The program, which was recently reauthorized through Dec. 31, 2019, now also includes incentives for hiring people who have been out of work for at least six months. There is no limit to how many employees you can hire and claim the credit for, as long as they meet the criteria and work a minimum of 120 hours in the first year.
Here’s a closer look at potential employees that could qualify your business for the tax credits.
Former military are touted for their teamwork, leadership and problem-solving skills. Your business can earn a tax credit if it hires an unemployed military vet.
Eligible veteran hires include:
A veteran who has been unemployed for a total of at least four weeks in the year before the hiring date or unemployed for a total of at least six months in the year before being hired. (The government tracks each group separately.)
A veteran with a qualifying service-connected disability who has been unemployed for a total of at least six months before being hired or who is hired within a year of active duty.
The hard truth is, the longer a person is unemployed, the harder it can be for them to get a job despite great credentials. And more people fell into that trap even as the economy sputtered back to life in recent years. Your business can qualify for a tax credit if it hires a person who had been out of work for at least 27 weeks, which is about 6 months, and had received unemployment benefits at some point during that time.
People with disabilities
People with a physical disability or a mental disability face high hurdles when it comes to finding jobs. Yet their skills can range from high tech to assembly-line capabilities. If you hire a person who has completed a vocational rehabilitation program, or is in a program, you can qualify for a tax credit if they work for you at least 120 hours in the first year.
Empowerment Zone or Rural Renewal County residents
If your business is in an Empowerment Zone, which is a designated area of high poverty and unemployment by the federal government, or a Rural Renewal County, which is one that has lost a certain amount of its population, and you hire a person age 18-39 who lives in the same zone or county, you may qualify for a tax credit. The employee has to work in the zone or county, too.
The tax credit for hiring a person who lives in an Empowerment Zone was recently extended through Dec. 31, 2016. Still, the person has to work at least 120 hours before the end of the year to qualify your business for the tax credit. Some types of businesses, including liquor stores and golf courses, don’t qualify for the credit.
There is also a Summer Youth Employee tax credit for 16- and 17-year-olds who live in an Empowerment Zone.
You can check to see if an address falls into an Empowerment Zone or Rural Renewal County at the Google WOTC Address Locator, here.
Food stamp or welfare recipients
Your business may benefit from both the skills and tax credits a person in this group brings to your operations. If the person has received welfare (Temporary Aid for Needy Families, or TANF), you can get a tax credit for part of the wages you pay them for the first two years they work for you. All other groups only let you claim a credit for first year wages.
Supplemental Social Security income recipients
If, within 60 days of being hired, your new employee has received SSI benefits, which are for people who are blind or have a physical disability, your business can qualify for a tax credit based on their wages and hours worked.
Increasingly, your business is at risk of employment discrimination if it has a blanket prohibition on hiring anyone with a criminal record. Of course, you have a right to check a potential employees’ background for any issues related to the specific job they would be doing. But a felony, which in some states includes possession of marijuana although the drug is legal in other states, can be a non-violent offense and may not necessarily affect a person’s ability to do the job or contribute to your business.
This credit applies to a new hire who, in the prior 12 months, was convicted of a felony or was released from prison for a felony. All of the Work Opportunity tax credits are off limits if the potential employee is a relative or dependent of the employer or part-owner of the business. For more information on whether a potential new hire is eligible, see these criteria details. Of course, to apply for the credits there is paperwork involved (more on that below). And deadlines!
How to apply for the hiring tax credit
First, you have to use IRS Form 8850 to pre-screen your job candidate. It’s a simple form, but you both have to fill it out and sign it. Then you have 28 days after your new employee starts work to get the form to your state workforce agency. The agency certifies whether or not the employee falls into one of the groups that qualifies your business to apply for the tax credit.
To find your state agency contact, click on this U.S. Labor Dept. map. To claim the credit, you have to show the IRS that your employee worked a minimum of 120 hours in the first year of employment. You do that, and claim the credit with, IRS Form 5884.
If you want to find potential hires who are already certified, contact your state employment agency. It will have pre-screened contacts for you who already filled out a conditional certification. Taking the time to find and hire a qualified person from one of the target groups can be a win, all around. The person gets a much needed job. Society gets a productive member. And your business gets a great new employee and a tax credit.
Image credit: Leeroy
Cyndia Zwahlen, a former small-business columnist for the Los Angeles Times, is a freelance business writer and editor for media, academic and business clients. She founded the Small Biz Mix blog.