Work Opportunity Tax Credit

By: Charles L. Telk Jr., CPA, Senior Tax Advisoremail

Back in 2007, the Work Opportunity Tax Credit was expanded – providing a tax credit to employers that hired certain new employees from specific rural counties. We reported this information to you with our letter dated August 3, 2007. We have been very surprised at the lack of businesses taking advantage of this expanded credit so we wanted to re-promote it to make certain that everyone is aware. An employer can claim a Federal tax credit for the qualified first year wages paid to new employees that meet specific requirements and reside in specific counties. Please note that a tax credit reduces your tax dollar for dollar – as opposed to a tax deduction which reduces taxable income. The employer must hire designated community residents. A designated community resident is a new employee who is at least 18 and has not reached the age of 40, and who lives in a designated county. 30 counties in Iowa qualify and 35 counties in Nebraska qualify as a designated county - as well as many counties in surrounding states. Please note that it is the employee that must reside in a designated county. It is not relevant where the employer is located. The credit amount varies. If the new employee works between 120 and 400 hours, the employer can claim a credit of 25% of the first $6,000 of qualified first year wages. This yields a maximum credit of $1,500. If the new employee works in excess of 400 hours, the credit jumps to 40% of the first $6,000 of qualified first year wages – a maximum credit of $2,400. In order to “qualify” a new employee, very specific time and filing requirements that be met. The employer must file IRS form 8850 with the employer’s local state workforce agency within 28 days of the employee beginning work.  In addition, the employer must complete form ETA, form 9061 or ETA 9062 with the state credit coordinator. Once computed, the actual tax credit is claimed on IRS form 5884 which is attached to your return. There are a few hoops to jump through to claim this credit, but at up to $2,400 for each new employee, it may very well be worth it. For specific questions regarding this credit, please contact Chuck Telk or Mark Reeter and we will be happy to assist you.