save taxes by hiring a veteran before the opportunity vanishes
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Can your business use a hefty tax credit? Thanks to the federal Work Opportunity Credit (WOTC), you could qualify for a credit of up to $9,600 per veteran if you hire an eligible vet by the end of the year. Of course you will need to move quickly to make it happen.TRANSCRIPT
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Save Taxes By Hiring a Veteran Before the Opportunity Vanishes
Can your business use a hefty tax credit? Thanks to the federal Work Opportunity Credit (WOTC), you could qualify for a credit of up to $9,600 per veteran if you hire an eligible vet by the end of the year. Of course you will need to move quickly to make it happen.
Background: The WOTC, created by Congress during the depths of the financial crisis, was supposed to expire last year. Earlier in 2013 it was extended until the end of this year. The law's original purpose was to stimulate employers like you to hire disadvantaged individuals and veterans. The only part of the law that was extended was the component applicable to vets.
The size of the tax credit varies according to the veteran's circumstances, his or her wages on your payroll, and the duration of employment. The IRS table below lays out the basics. The credit is applied against normal business income on IRS form 3800. It is subject to the same carry-back and carry-forward rules applicable to other credits.
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Category of Qualified Veteran being hired by taxable employer before 1/1/14
Worked at least 120 hours but less than 400 hours as of the date Form 5884 is filed
Worked at least 400 hours as of the date Form 5884 is filed
Veteran certified as being a member of a family receiving assistance under a supplemental nutrition assistance program under the Food and Nutrition Act of 2008, for at least a 3-month period ending during the 12-month period ending on the hiring date.
Max Credit:25% of $6,000 of first-year wages (up to $1,500)
Max Credit:40% of $6,000 of first-year wages (up to $2,400)
Veteran certified as having aggregate periods of unemployment of at least 4 weeks but less than 6 months in the year prior to being hired.
Max Credit:25% of $6,000 of first-year wages (up to $1,500)
Max Credit:40% of $6,000 of first-year wages (up to $2,400)
Disabled veteran who is certified as having a hiring date which is not more than 1 year after discharge or release from active duty.
Max Credit:25% of $12,000 of first-year wages (up to $3,000)
Max Credit:40% of $12,000 of first-year wages (up to $4,800)
Veteran certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired.
Max Credit:25% of $14,000 of first-year wages (up to $3,500)
Max Credit:40% of $14,000 of first-year wages (up to $5,600)
Disabled veteran who is certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired.
Max Credit:25% of $24,000 of first-year wages (up to $6,000)* For veterans in this category hired before November 22, 2011, the max credit is 25% of $12,000 of first-year wages (up to $3,000)
Max Credit:40% of $24,000 of first-year wages (up to $9,600)* For veterans in this category hired before November 22, 2011, the max credit is 40% of $12,000 of first-year wages (up to $4,800)
Defining "Veteran"
First things first: How is a "qualified veteran" defined? Generally it's someone who has served for at least 180 days on active duty. An exception is made for service members released from duty due to a service-related injury. Also, time in basic training doesn't count towards that 180-day minimum.There is a two-step process required to become eligible for the tax credit -- beyond hiring the veteran or veterans before December 31:
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Step 1: Fill out a Form 8850 "pre-screening notice and certification request" questionnaire and submit it to your state employment security agency. The actual form requires input both from you and the veteran. Ideally you would complete and send it to your state agency before or when you hire the veteran. However, the form can be sent in within 28 days of hiring. If your state agency declines certifying the 8850, it must explain the basis of its rejection. In theory that opens the door for an appeal if the agency has made a mistake in rejecting the application
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Step 2: Assuming you get the green light from your state agency, when you ultimately file your regular business tax return, you include a completed Work Opportunity Credit Form 5884. But you can elect to make a claim for that credit with Form 5884 "at any time within three years from the due date or your return on either your original return or amended return," according to the IRS. Also, if you are a taxpayer whose only source of this credit is from an S corporation, you can forget about the Form 5884 and simply report the credit directly on Form 3800.
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Tax-Exempts Can Also Benefit
The tax credit is also available to tax-exempt employers, but, given the fact those entities do not pay income tax, the credit is applied against the employer's FICA obligations.
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You will, naturally, need to consider this opportunity in light of your overall workforce needs; tax-saving opportunities are but one variable in the equation. More important is whether you actually need to expand your workforce, and whether a veteran satisfying any of the five criteria for tax credit eligibility is available to fill a specific gap in your employee population, or a gap that you anticipate will occur not too long after the end-of-year hiring deadline.
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