5 Things to Know About the Work Opportunity Credit (Form 5884)

According to the U.S. Bureau of Labor Statistics, up to 27% of formerly incarcerated people remain unemployed and struggle to land a job that pays a living wage.

It’s interesting to note that 82% of managers think the ex-felons they recruit perform at least as well at work as those without a criminal record.

It might be a good idea for your company to think about diversifying its personnel base in a competitive labor market. In fact, by doing this, your company may be able to claim the Work Opportunity Tax Credit (WOTC) on your federal taxes using Form 5884.

Understanding how to utilize the WOTC’s advantages might be beneficial to both you and your qualified worker.

How Does Form 5884 Work?

Businesses that wish to claim a tax work credit because they hire workers from a certain demographic of workers must complete Form 5884, according to the IRS.

Usually, the company hires those who have encountered difficulties finding a job. The company receives a tax credit as a result of choosing to hire a worker who frequently has trouble finding a job.

The program’s objective is to help unemployed workers find work while giving them a much-needed chance. In exchange for taking a chance on a possible employee, the business receives a tax credit, and the workplace frequently becomes more diverse.

1. Eligibility

The Work Opportunity Credit has fewer eligibility requirements than many other tax credits accessible to small enterprises.

There are no limitations on the size of your company or even the number of employees you must hire from the underrepresented group. All you have to do is hire one or more workers from an underemployed group.

Consider hiring a member of one of the designated groups. In that situation, the company simply needs to submit a tax credit claim after receiving certification that the employee belongs to one of the specified worker populations.

Form 8850 would be filled out and sent to the IRS. For the IRS, this form serves as a pre-screening and certification request. The required certification can be obtained through a few procedures.

When hiring an employee—or even before—you should file Form 8850 with the IRS. The IRS will then request certification from your state’s workforce agency that you are planning to offer employment to a member of the designated category.

It’s crucial to remember that you cannot finish Form 8850 until you have the formal certification. Once you get the certification and within 28 days of the employee starting work, you and the employee you’ve employed must both sign Form 8850.

When you submit your business tax filing together with IRS Form 3800, Form 8850 is included as part of the paperwork.

2. Which Groups Are Eligible for a Tax Credit?

To qualify for the work credits, the employee must belong to a specific category that is having trouble finding employment. The groups consist of:

  • IV-A recipient who is qualified
  • Competent veteran
  • Ex-felon
  • A specific community member
  • Recommendation for vocational rehabilitation

Despite the lengthy number of people who might be eligible, each belongs in some manner to a marginalized or at-risk group.

An employee who is hired and resides in an area designated as an “empowerment zone” or “rural renewal county” is an example of a designated community inhabitant. Additionally, the worker must be between the ages of 18 and 40.

Another illustration would be a worker who is referred to you by vocational rehabilitation. A person with a physical or mental disability is this employee. They have obtained some recovery therapy. Therefore, a rehab agency refers them for employment.

3. Utilizing IRS Form 5884 to Apply

It’s crucial to follow these procedures if you intend to hire someone from one of these groups to submit an application and be approved for the tax credit.

The employer will first finish Form 8850, the (Pre-Screening Notice and Certification Request). Remember, this stage certifies the prospective employee as belonging to one of the groups mentioned above.

Form 9061 must be completed by you (Individual Characteristics Form). As part of the certification procedure, the employee’s information is provided on this form. This covers the employee’s background information as well as demographic data.

Within 28 days of the person starting work, this paperwork must be turned in to the workforce agency in your state. Be ready for your application to be rejected if you don’t submit it within the allotted 28 days.

Before continuing, you must wait for the verdict and obtain the certification. After that, you can claim the tax credit by submitting Form 8850.

4. When to File Form 5884 of the IRS

After completing Form 5884, you should add the results to Form 3800. You must submit both papers with your regular or modified tax return.

It’s important to note that after filing, you have three years from the return’s due date to claim the tax credit. Consequently, you might apply for the tax credit and wait until the following year to use it.

Some firms use this option because they have exhausted their IRS tax credit allotment.

5. What Is the Value of the Tax Credit?

You might be unsure if the paperwork required for the tax credit is worthwhile. Depending on what you’re filing, the amount of the tax credit will change.

Depending on your circumstances, you could submit a full or partial claim for credit. The method may result in tax credits worth up to $9,600 for each employee of a business.

The amount of a tax credit you receive also changes based on the group that the company is employing. The maximum tax credit is often around $2,400.

To Sum Up

Using IRS Form 5884, you can obtain tax credits if you choose to employ people from a population of employees who are at risk. Additionally, it can assist a company that is having trouble filling job opportunities with willing people.

Your Part Time Accountant can assist if you need more information about Form 5884 or want to find out more about other possible tax benefits.