The work opportunity credit provides businesses with an incentive to hire individuals from groups that have a particularly high unemployment rate or other special employment needs. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified first-year wages" to a "targeted group employee."
The work opportunity credit includes New York Liberty Zone business employees. This part of the work opportunity credit is called the New York Liberty Zone business employee credit. It has a different tax liability limit and is figured separately on Form 8884. For details, see New York Liberty Zone Business Employee Credit, earlier.
This credit is set to expire for individuals who begin work for you after December 2003. However, at the time this publication was issued, Congress was considering legislation that would allow this credit with respect to employees who began work for you in 2004. See What's Hot in Tax Forms, Pubs, and Other Tax Products at www.irs.gov/formspubs to find out if this legislation was enacted.
A targeted group employee is any employee who has been certified by your state employment security agency (SESA) as a:
- Recipient of assistance under Temporary Assistance for Needy Families (TANF),
- High-risk youth, age 18 to 24 who lives in an empowerment zone, enterprise community, or renewal community,
- Vocational rehabilitation referral,
- Summer youth employee, age 16 or 17 who lives in an empowerment zone, enterprise community, or renewal community,
- Food stamp recipient, or
- Supplemental security income (SSI) recipient.
The employee must meet the requirements explained in the instructions to Form 8850.
An employee is not considered a targeted group employee without SESA certification. To receive certification, submit Form 8850 to your SESA.
You must either:
- Receive the certification by the day the individual begins work, or
- Do both of the following:
- Complete Form 8850 by the day you offer the individual a job, and
- Submit the form to your SESA by the 21st day after the individual begins work.
Qualified first-year wages are qualified wages you pay or incur for work performed by a targeted group employee during the 1-year period beginning on the date the individual begins work for you. Qualified wages are generally wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each tax year for each employee ($3,000 each tax year for a summer youth employee).
If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $6,000 of that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51(h)(1)(B) of the Internal Revenue Code.taxmap/pubs/p954-008.htm#TXMP0d9e40c5
See Form 5884 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who:
- Has worked for you for more than 1 year,
- Is your relative or dependent,
- You rehired, or
- Does not work for you for at least 120 hours.
If you are a successor employer, the 1-year period begins on the date the employee first began work for the previous employer and any qualified first-year wages paid by the successor employer are reduced by the qualified first-year wages paid by the previous employer. You are a successor employer if you acquire substantially all of the property used in a trade or business (or a separate unit thereof) of another employer (previous employer) and immediately after the acquisition you employ in your trade or business an individual who was employed immediately prior to the acquisition in the trade or business of the previous employer.taxmap/pubs/p954-008.htm#TXMP7b1e5512
The following table shows the rate you apply to qualified first-year wages you pay or incur each tax year to a targeted group employee who works for you for the number of hours shown. The table also shows the maximum credit you can claim each tax year for each targeted group employee.
Table 5. Rate and Maximum Credit Each Tax Year for Each Targeted Group Employee
| || || Maximum || |
| || || Qualified || |
| || || First-Year || Maximum |
| Hours Worked For You || Rate || Wages || Credit |
|At least 400||40%||$6,000*||$2,400|
|Fewer than 400 but at least 120||25%|| 6,000*||1,500|
|*$3,000 for a summer youth employee|
Use Form 5884 to claim this credit.taxmap/pubs/p954-008.htm#TXMP51518b5d
In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year work opportunity credit (before applying the tax liability limit).taxmap/pubs/p954-008.htm#TXMP5113e6ee
Wages you use to claim the work opportunity credit cannot be used to figure the empowerment zone or renewal community employment credits. In addition, they reduce the maximum wage amount you can use to figure either of those credits.taxmap/pubs/p954-008.htm#TXMP343ce0f9
You cannot claim both the work opportunity credit and the welfare-to-work credit for the same employee during the same tax year.taxmap/pubs/p954-008.htm#TXMP213ac853
Wages you use to claim the work opportunity credit cannot be used to figure the New York Liberty Zone business employee credit.taxmap/pubs/p954-008.htm#TXMP575e04c9
For more information about the work opportunity credit, see Form 5884.