The U.S. Bureau of Labor Statistics estimates that as many as 27% of ex-felons are unemployed and have difficulty finding gainful employment.
Interestingly, 82% of managers say that the ex-felons they hire are at least as successful on the job as those without a criminal background.
In a challenging job market, it might be wise for your business to consider broadening its employee pool. In fact, by doing this, your business could actually qualify for the Work Opportunity Tax Credit (WOTC) using Form 5884 on your federal taxes.
Knowing how to take advantage of the benefits of the WOTC can help both you and your qualified worker. Read on to learn more about the work opportunity tax credit and how to use Form 5884 to qualify your business for a valuable tax credit.
What Is Form 5884?
The IRS uses Form 5884 for businesses that want to apply for a tax work credit because they employ workers from a specific population of workers.
Typically, the people the business employs are workers who have faced barriers to employment. Since the business has chosen to employ a worker who consistently faced challenges finding work, they earn a tax credit in return.
The program’s goal is to allow struggling workers to gain employment while providing them with a needed opportunity. The workplace often becomes more diverse, and the employer earns a tax credit for taking a risk on the potential employee.
1. How to Qualify
Unlike many other tax credits available to small businesses, the Work Opportunity Credit has limited eligibility qualifications.
There are no restrictions on the size of your business or even how many workers you must employ from the marginalized population. You simply need to employ a worker or more than one from an underemployed population.
Suppose you employ a worker from one of the identified groups. In that case, the business needs to only claim the tax credit by receiving a certification proving that the employee is from one of the identified populations of workers.
You would complete and submit Form 8850 to the IRS. This form is a pre-screening and certification request for the IRS. There are a few steps to get the needed certification.
You should complete Form 8850 with the IRS when you hire or even before you hire the employee. When you do this, the IRS then has your state workforce agency certify that you’re about to offer employment to a worker in the identified group.
It’s important to note that you can’t complete Form 8850 until you’ve received the official certification. Then both you and the worker you’ve hired will need to sign Form 8850 once you have the certification and within 28 days of the worker starting employment.
Once you complete Form 8850, then it goes on your tax filing with IRS Form 3800 when you submit your business tax filing.
2. What Groups Qualify for the Tax Credit
Remember, to get the work credits, and the employee must come from a specified group struggling to find employment. The groups include:
- Qualified IV-A recipient
- Qualified veteran
- Designated community resident
- Vocational rehabilitation referral
- Summer youth employee
- Supplemental Nutrition Assistance Program (SNAP) recipient
- Supplemental Security Income (SSI) recipient
- Long-term family assistance recipient
- Qualified long-term unemployment recipient
While the list of who might qualify is long, in some way, each is part of either an at-risk or marginalized population.
For example, a designated community resident would be an employee who is hired and lives in an area designated as an “empowerment zone” or “rural renewal county.” The employee must also be between the ages of 18 and 40.
Another example might be a worker who comes to you from a vocational rehabilitation referral. This is a worker who has a physical or mental disability. They are referred for work by a rehab agency because they have received some rehabilitation services.
3. Applying With IRS Form 5884
If you wish to employ a worker from one of these groups, it’s important to follow these steps to ensure you apply and qualify for the tax credit.
First, the employer will complete Form 8850, the (Pre-Screening Notice and Certification Request). Remember, this step gets the potential employee certified as coming from one of the above groups.
You will need to complete Form 9061 (Individual Characteristics Form). This form provides information about the employee as part of the certification process. This includes demographic information as well as background information on the employee.
These forms must be submitted to your state’s workforce agency within 28 days of the employee starting work. If you miss the 28-day window, be prepared for your application to be denied.
You need to wait for the determination and get the certification before going further. Then you will get the tax credit by completing Form 8850.
4. When to File IRS Form 5884
Once you’ve completed Form 5884, then you’ll add the amounts you get onto Form 3800. Both forms get filed along with your regular or amended tax filing.
Once filed, it’s worth noting that you can claim this tax credit anytime within three years of the due date on your return. So, you could file for the tax credit and not use it until the following year.
Some businesses need this option since they max out their tax credit allowance through the IRS.
5. How Much Is the Tax Credit Worth?
You might wonder if it’s worth the paperwork for the tax credit. The tax credit amount will vary depending on what you’re filing.
You could claim full or partial credit, depending on your situation. A business could potentially garner up to $9,600 per employee from the process in tax credits.
The amount you get for a tax credit also varies depending on which group the business is hiring from. In most cases, the maximum tax credit is about $2,400.
What You Need to Know About Form 5884
Deciding to hire from an at-risk population of workers can get you tax credits by using the IRS Form 5884. It can also help a business struggling to find workers fill some openings with employees who want to work.
If you have more questions about Form 5884 or want to learn more about other potential tax credits, we can help. Learn more about how to apply for tax credits here.