IRS updates WOTC guidance

The Internal Revenue Service published updated information about the Work Opportunity Tax Credit to help employers deal with a tight labor market and after a scathing investigative report about how the longtime tax credit is being abused.

The updates, posted Monday by the IRS, include information on the pre-screening and certification process. To satisfy the requirement to pre-screen a job applicant, on or before the day a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. 

An earlier version of the tax breaks, the Targeted Jobs Tax Credit, did not contain a pre-screening requirement. In enacting WOTC to replace the TJTC in 1996, Congress included the requirement that employers pre-screen job applicants before or on the same day the job offer is made. When it did that, Congress emphasized that the WOTC is designed to incentivize the hiring and employment of certain categories of workers. A recent report by the investigative news organization, ProPublica, found the WOTC was often being claimed by temporary employment agencies that hired convicted felons as workers and soon laid them off. 

Samuel Corum/Bloomberg

After pre-screening a job applicant, the IRS said the employer must then request certification by submitting Form 8850 to the appropriate state workforce agency no later than 28 days after the employee begins work. Other requirements and further details can be found in the instructions PDF to Form 8850.

WOTC has 10 designated categories of workers. The 10 categories are:

• Qualified IV-A Temporary Assistance for Needy Families recipients;
• Certain veterans, including unemployed or disabled veterans;
• The formerly incarcerated or those previously convicted of a felony;
• Designated community residents living in Empowerment Zones or Rural Renewal Counties;
• Vocational rehabilitation referrals;
• Summer youth employees living in Empowerment Zones;
• Supplemental Nutrition Assistance Program food stamp recipients;
• Supplemental Security Income recipients;
• Long-term family assistance recipients; and
• Qualified long-term unemployment recipients.

Last month, the IRS issued a notice giving employers more leeway in claiming the WOTC to hire people in underprivileged areas who face significant obstacles to employment for jobs in summer youth and community programs (see story).

While the credit generally isn't available to tax-exempt organizations, a special provision allows them to claim the WOTC against the employer's share of Social Security tax for hiring qualified veterans. These organizations can claim the credit on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. For more information, visit the WOTC page on IRS.gov.