Form 5884 – Work Opportunity Credit

The tax code can seem like a maze of forms and rules, but sometimes, there are hidden gems that can help businesses. One of these gems is the Work Opportunity Tax Credit, or WOTC, claimed using IRS Form 5884. Let’s dive into what this form and credit are all about and see if it might apply to you.

What is the Work Opportunity Tax Credit (WOTC)?

At its heart, the Work Opportunity Tax Credit is a federal program designed to incentivize businesses to hire people who often face challenges finding work. Think of it as a win-win situation: businesses get a tax break, and individuals from disadvantaged groups get job opportunities. It’s a way the government tries to support both businesses and specific communities. The WOTC is not a new program – it has been around since 1996 but continues to evolve, and is not a permanent program, congress needs to extend it from time to time.

Who Qualifies for the Work Opportunity Tax Credit?

The WOTC isn’t available for every hire you make. It’s targeted at specific groups of people, known as “targeted groups”. These include:

• Qualified IV-A Recipients: This refers to people who are receiving aid from the Temporary Assistance for Needy Families (TANF) program.

• Qualified Veterans: Veterans who are either unemployed or have service-connected disabilities may qualify under this group. Specific criteria apply to determine if a veteran meets the qualifications.

• Ex-Felons: Individuals who have been convicted of a felony and have been released from prison may be eligible if they meet certain conditions.

• Designated Community Residents: People who live in particular economically disadvantaged areas may qualify.

• Vocational Rehabilitation Referrals: Those who have completed, or are in, a vocational rehabilitation program.

• Summer Youth Employees: Certain youth hired during summer months may qualify as part of this incentive.

• Supplemental Nutrition Assistance Program (SNAP) recipients: individuals receiving SNAP benefits may qualify.

• Supplemental Security Income (SSI) recipients: individuals receiving SSI may qualify.

• Long-Term Family Assistance Recipients: This includes recipients of TANF assistance for a prolonged period.

It’s important to note that each category has specific eligibility criteria, and it’s crucial to verify if a new hire fits into any of these before trying to claim the credit.

How Does the WOTC Work?

The amount of the tax credit you can claim depends on the employee’s wages and the number of hours they work. Here’s a simplified overview:

1. Pre-Screening: Before you hire a person, you need to determine if they are potentially a member of a targeted group. You typically do this by having them fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. The form is then submitted to the state workforce agency that will eventually certify that the new hire is a member of the targeted group.
2. Certification: Once you hire the worker, the state workforce agency must certify that they indeed are from a targeted group. This certification is necessary before claiming the WOTC, and should be obtained by the employer before filing taxes for the tax year the employee was hired.
3. Wage Calculation: For most targeted groups, the credit is 40% of the first $6,000 in wages paid to each qualifying new hire. This means the maximum credit for most hires is $2,400. However, for summer youth employees, the amount is lower.
4. Claiming the Credit: Once you get your certification, and calculate the credit, you then use IRS Form 5884 to claim the credit on your business tax return.

Let’s look at an example:

Let’s say you own a small business and hire a veteran who is certified as a member of a qualified group. This veteran works full-time for you, and you pay them $10,000 in their first year.

• You can claim the credit on the first $6,000 of their wages
• The credit is 40% of the first $6,000 = $2,400.
• You file Form 5884 when you file your taxes and can reduce your federal tax liability by $2,400.

Form 5884: Claiming Your Credit

This is where Form 5884 comes into play. As mentioned earlier, you must file this form when you file your federal income tax return in order to claim the WOTC. Here’s how to approach Form 5884:

• Keep Accurate Records: Ensure you’ve kept detailed records of each employee’s wages and hours worked.
• Proper Certification: Ensure you have the certification from the state workforce agency.
• File it Correctly: Accurately fill out the form, making sure all information is correct, then submit with your federal income tax return.
• Consult a Professional: If you’re unsure about any part of the process, consider consulting with a tax professional. They can help ensure you’re taking full advantage of the credit while remaining compliant with the rules.

Related Tax Concepts to the Work Opportunity Credit

The Work Opportunity Credit is one part of a complex tax system that includes a variety of credits and deductions to incentivize certain business practices and personal choices. It’s helpful to understand how the WOTC fits into the larger context of business tax obligations. Here are a few related terms:

• General Business Credit: This is a category of tax credits that includes the WOTC and other credits that can be claimed by businesses. The WOTC is one component of the general business credit, and may be used in addition to other credits within this category.
• Tax Credits: These are direct reductions to your tax liability. Unlike deductions, which reduce taxable income, tax credits reduce the actual amount you owe.
• Tax Deductions: These are expenses that you can subtract from your gross income, which lowers the amount of your income that is subject to tax.
• IRS Form 8850: As mentioned above, this form is used to pre-screen new employees, and must be filed before, or on the date, the worker begins employment to be eligible for the WOTC.
• State Workforce Agency: This is the agency that you must send form 8850 to, and which ultimately issues the certification that the new hire is a member of a qualified group.

Common Mistakes and Misconceptions About the WOTC

Here are a few common mistakes or misconceptions people have about the Work Opportunity Tax Credit. It is helpful to avoid them to make sure you’re using the credit correctly:

• Thinking it Applies to All Hires: Remember that the WOTC only applies to people within the specific targeted groups.
• Skipping Pre-Screening: Always pre-screen employees before you hire them using Form 8850. Not submitting the form before or on the date of hire will disqualify the worker from the WOTC program.
• Failing to Seek Certification: Without the proper certification from your state workforce agency, you can’t claim the credit. This is a crucial step that can easily be overlooked. Make sure to contact your state agency after hiring the new employee and ask for the certification.
• Underestimating the Record-Keeping: The IRS requires detailed records for wages, hours, and eligibility of each employee for which you’re claiming the WOTC. Keep good records, because if you get audited, that will be very helpful.
• Overlooking State Programs: Many states also have their own version of the WOTC, so be sure to research opportunities at both the federal and state level.
• Missing the Deadline: Remember that form 5884 needs to be submitted when you file your federal tax return. It’s important to file it correctly and on time.

Tips for Taking Advantage of the WOTC

Here are some tips to help you take advantage of the WOTC:

• Integrate into Hiring Practices: Train your hiring team to be aware of the WOTC and include pre-screening as a regular part of your recruitment process.
• Use Tax Software: Tax software programs often include features to help with tax credits.
• Seek Expert Advice: Consider consulting with a tax professional to help with pre-screening and filing for the WOTC.
• Double-Check Requirements: The WOTC requirements and the groups that are targeted can change over time, so be sure to verify current rules each year.
• Don’t Hesitate to Ask Questions: The tax world can be complex, but the WOTC is a powerful tool for those who know how to use it.
• State Tax Opportunities: Many states offer their own versions of the WOTC, and may have additional tax credits or incentives. Be sure to check your state regulations.

By being mindful of these details and taking the necessary steps, you can leverage the Work Opportunity Tax Credit to not only help lower your tax burden but also to provide employment to people who need it.