Tax Incentives for Employers

What's New

Important Tax Changes for 2002

Tax Incentives for Employers

Introduction

Tax Incentives for Employers provides information on how small business owners can participate in both the public and private effort to help move individuals with special employment needs and long-term family assistance recipients into jobs in the private sector. By actively recruiting from these groups, you can expand your job applicant pool of entry-level workers and, at the same time, make an important contribution to a national effort that affects your community. By hiring and retaining these individuals, you can receive tax savings with the work opportunity credit of as much as $2,400 per employee for first-year wages paid. With the welfare-to-work credit you can receive as much as $8,500 per employee over a 2-year period.

References

Publication 334, Tax Guide For Small Business (for individuals who use Schedule C or C-EZ)
Publication 954, Tax Incentives For Empowerment Zones And Other Distressed Communities
Form 3800, General Business Credit
Form 5884, Work Opportunity Credit
Form 8850,Pre-Screening Notice And Certification Request For The Work Opportunity And Welfare-To-Work Credits
Form 8861, Welfare-to-Work Credit
U.S. Department of Labor ETA-9061, Individual Characteristics Form, Work Opportunity Credit And Welfare-To-Work Credit
U.S. Department of Labor ETA-9062, Conditional Certification, Work Opportunity And Welfare-To-Work Tax Credits

Work Opportunity Credit

The work opportunity credit provides businesses with an incentive to hire individuals from groups that have a particularly high unemployment ratio or other special needs. Your business does not have to be designated an empowerment zone, enterprise community or renewal community (see Publication 954,Tax Incentives For Empowerment Zones And Other Distressed Communities) to qualify for this credit. You can claim the credit if you pay or incur " qualified first-year wages" to a " targeted group employee" who began work for you after September 1997 and before January 1, 2002.

Targeted Group Employee

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),
Veteran,
Ex-felon,
High-risk youth,
Vocational rehabilitation referral,
Summer youth employee,
Food stamp recipient or
Supplemental security income (SSI) recipient.

Exhibit 5.1 pages 5-3 lists their qualifications and necessary documentation.

State Certification

An employee is not considered a targeted group employee or a long-term family assistance recipient without SESA certification. To receive certification, submit Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity and Welfare-To-Work Credits, to your SESA.

You must either:

1. Receive the certification by the day the individual begins work or

2. Do both of the following:

a. Complete Form 8850 by the day you offer the individual a job and
b. Submit the form to your SESA by the 21st day after the individual begins work.

See Exhibit 5.2, and Exhibit 5.3, on pages 5-6 and 5-7 for instructions and a filled-in Form 8850.

In addition, mail as soon as possible either:

1. U.S. Department of Labor ETA-9061, Individual Characteristic Form(with all supporting documentation), if the employee has not been conditionally certified already by your SESA or a participating agency (see filled in example Exhibit 5.4) or

2. U.S. Department of Labor ETA-9062, Conditional Certification Form, if provided to the applicant by a participating agency (e.g., the Job Corps).

Qualified First-Year Wages

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 subject to FUTA tax - up to $6,000 each tax year* for each employee ($3,000 each tax year* for a summer youth employee).

*Note: The one-year period can cover two tax years.

Example: Your certified employee began working for you on November March 26, 2001, tax year 2001. The 1-year period ends March 26, 2002, tax year 2002.

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.

Nonqualified Wages

Some of the most common wages that do not qualify include wages you pay or incur to an employee who:

Has worked for you more than 1 year,
Is your relative or dependent,
Worked for you previously or
Does not work for you at least 120 hours.

See Form 5884, Work Opportunity Credit, for a complete list of wages that do not qualify for the credit.

Amount of Credit

The table below shows the rate you apply to qualified first-year wages you pay or incur each tax year to a targeted group employee who works the number of hours shown and the maximum
credit you can claim each tax year for each targeted group employee.

For more information, go to the Small Business Workshop Workbook pages 5-9.

Claiming the Credit

Use Form 5884 to claim this credit (Exhibit 5.5) and file it with your tax return. For example, sole proprietors claiming the credit on their 2000 tax returns entered the credit on Form 1040, Line 49, Other Credits.

EXHIBIT 5.5 - Form 5884, Work Opportunity Credit pages 5-10.

Complete Form 3800, General Business Credit (Exhibit 5.6), instead of completing Part II of Form 5884 to figure the tax liability limit for the credit if for this year you are also claiming the welfare-to-work credit.

Effect on Salary and Wage Deduction

In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your work opportunity credit. For a sole proprietor, this is on Schedule C of Form 1040.

Effect of Welfare-to-Work Credit

You cannot claim both the work opportunity credit and the welfare-to-work credit for the same employee during the same tax year. In some cases, in may be more advantageous to claim the work opportunity credit the first year and the welfare-to-work credit the second year.

More Information

For more information about the work opportunity credit, see Form 5884 or visit the Department of Labor Web site at www.doleta.gov or call 1-800-695-6879 for forms and information.

You can also use the Department of Labor's fax on demand service by calling (703) 365-0768 (not a toll-free number) from your fax machine and following the prompts.

Checklist

Before claiming the credit, use this checklist

_ Form 8850 completed and signed by:
_ Employer and
_ Employee
_ ETA Form 9061,Individual Characteristics Form and
_ Documents attached to demonstrate eligibility or
_ ETA Form 9062, Conditional Certification Form, from an authorized participating agency.

IMPORTANT!

Information must be entered on Form 8850 on or before the day a job offer is made.

Form 8850 must be postmarked within 21 days of the employee's start date and have original signatures.

ETA-9061 should be mailed as soon as possible and does not need original signatures.

Note: At the time this workbook was printed, the credit was set to expire for individuals who begin working for you after Dec. 31, 2001.

Welfare-to-Work Credit

The welfare-to-work credit provides businesses with an incentive to hire long-term family assistance recipients. Your business does not have to be 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" who began work for you after Dec. 1997 and before Jan. 1, 2002.

Long-term Family Assistance Recipient

A long-term family assistance recipient is an individual who has been certified by your 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,
Received 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
After August 5, 1997, stopped being eligible 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.

State Certification Required

An individual is not considered a long-term family assistance recipient without SESA certification. To receive certification, submit Form 8850 to your SESA.

You must either:

1. Receive the certification by the day the individual begins work or

2. Do both of the following:

a. Complete Form 8850 by the day you offer the individual a job and
b. Submit the form to your SESA by the 21st day after the individual begins work.

See Exhibit 5.2 on page 5-5 and Exhibit 5.3 on pages 5-6 and 5-7 for instructions and a filled-in Form 8850.

In addition, mail as soon as possible either:

1.U.S. Department Of Labor ETA-9061, Individual Characteristic
Form (with all supporting documentation), if the employee has not been conditionally certified already by your SESA or a participating agency (see filled in example Exhibit 5.4 on page 5-8 or

2. U.S. Department Of Labor ETA-9062, Conditional Certification Form, if provided to the applicant by a participating agency (e.g., the Job Corps).

Qualified Wages

Qualified wages are generally wages subject to FUTA taxes 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 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.

Nonqualified Wages

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,
Worked for you previously or
Does not either:
a. Work for you at least 180 days or
b. Complete at least 400 hours of service.

For a complete list of nonqualified wages, see the general instructions for Form 8861.

Amount of Credit

The following table shows the rate you apply to the qualified wages you pay or incur during each year of employment and the maximum credit you can claim each tax year for each qualified employee. Go to the Small Business Workshop Workbook page 5-15.

Qualified First-Year Wages

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.

Qualified Second-Year Wages

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.

Claiming the Credit

Use Form 8661 to claim this credit (Exhibit 5.7), on page 5-16 and file it with your tax return.

Effect on Salary and Wage Deduction

In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your welfare-to-work credit.

Effect of Work Opportunity Credit

You cannot claim both the welfare-to-work and the work opportunity credit for the same employee during the same tax year. In some cases, in may be more advantageous to claim the work opportunity credit the first year and the welfare-to-work credit the second year.

More Information

For more information about the welfare-to-work credit, see Form 8861 or visit the Department of Labor Web site at www.doleta.gov or call 1-800-695-6879 for forms and information. You can also use the Department of Labor's fax on demand service by calling (703) 365-0768 (not a toll-free number) from your fax machine and following the prompts.