The welfare-to-work credit provides businesses with an incentive to hire long-term family assistance recipients. 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 wages" during the first 2 years of employment to a "long-term family assistance recipient."
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 long-term family assistance recipient is an individual who has been certified by your state employment security agency (SESA) as a member of a family that:
- Has received assistance payments from Temporary Assistance for Needy Families (TANF) for at least 18 consecutive months ending on the hiring date,
- Receives assistance payments from TANF for any 18 months (whether or not consecutive) beginning after August 5, 1997, and is hired not more than 2 years after the end of the earliest 18-month period, or
- Stops being eligible after August 5, 1997, for assistance payments because federal or state law limits the maximum period that assistance is payable, and is hired not more than 2 years after that eligibility for assistance ends.
An individual is not considered a long-term family assistance recipient without SESA certification. To receive certification, submit Form 8850to 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 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 $10,000 each tax year for each employee.
If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $10,000 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 51A(b)(5)(C) of the Internal Revenue Code.
For this credit, qualified wages also generally include the following amounts paid or incurred by the employer that are normally excludable from the employee's gross income.
- Amounts received for medical care under accident and health plans.
- Employer-provided coverage under accident and health plans.
- Certain amounts excludable under an educational assistance program.
- Amounts excludable under a dependent care assistance program.
See Form 8861 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 2 years,
- Is your relative or dependent, or
- Does not either:
- Work for you for at least 180 days, or
- Complete at least 400 hours of service.
The following table shows the rate you apply to the qualified wages you pay or incur during each year of employment. The table also shows the maximum credit you can claim each tax year for each qualified employee.
Table 6. Rate and Maximum Credit Each Tax Year for Each Long-Term Family Assistance Recipient
| || || Maximum || |
| || || Qualified || Maximum |
| || Rate || Wages || Credit |
|Qualified first-year wages||35%||$10,000||$3,500|
|Qualified second-year wages||50%||$10,000||$5,000|
Qualified first-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the date the individual begins work for you.taxmap/pubs/p954-009.htm#TXMP028920a9
Qualified second-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the day after the last day of the first-year wage period.taxmap/pubs/p954-009.htm#TXMP70ff62f9
If you are a successor employer, the 1-year period for qualified first-year wages begins on the date the employee first began work for the previous employer. The 1-year period for qualified second-year wages begins on the day after the last day of that first-year wage period. Any qualified first-year wages paid by the successor employer are reduced by the qualified first-year wages paid by the previous employer. Also, any qualified second-year wages paid by the successor employer are reduced by the qualified second-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/p954-009.htm#TXMP0457bbde
Use Form 8861 to claim this credit.taxmap/pubs/p954-009.htm#TXMP039c5155
In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your current year welfare-to-work credit (before applying the tax liability limit).taxmap/pubs/p954-009.htm#TXMP1496918e
Wages you use to claim the welfare-to-work 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/p954-009.htm#TXMP13a9a3e9
You cannot claim both the welfare-to-work credit and the work opportunity credit for the same employee during the same tax year.taxmap/pubs/p954-009.htm#TXMP36f4c69a
You cannot claim both the welfare-to-work credit and the New York Liberty Zone business employee credit for the same employee during the same tax year.taxmap/pubs/p954-009.htm#TXMP7e7c1f7f
For more information about the welfare-to-work credit, see Form 8861.