Small Business Taxes & Management

Special Report

Work Opportunity Tax Credit for Hiring Veterans Expanded

Notice 2012-13 provides guidance on Returning Heroes and Wounded Warriors Work Opportunity Tax Credits, included in the VOW to Hire Heroes Act of 2011, enacted on November 21, 2011. The new law provides a credit for hiring certain qualified veterans. These credits can be substantial, ranging from 25% of the first $6,000 of wages (maximum credit of $1,500) to 40% of the first $24,000 of first-year wages (maximum credit of $9,600). The amount of the credit varies depending on the length of employment and the category of the veteran. (This notice provides additional guidance on electronic signature and electronic submission of Form 8850 and also informs all employers that the Internal Revenue Service (IRS) will allow the signature and submission of Form 8850 by facsimile to DLAs that choose to accept such submissions.)

Background

Section 51 provides for a Work Opportunity Tax Credit (WOTC) for employers who hire individuals who are members of targeted groups. An employer must obtain certification from a Designated Local Agency (DLA) that an individual is a targeted group member before the employer may claim the credit. A DLA is a State employment security agency. An employer must submit Form 8850 to the DLA not later than the 28th day after the individual begins work for the employer.

The WOTC applies to certain wages paid or incurred by employers with respect to a member of a targeted group. Prior to enactment of the Act, Sec. 51(c)(4)(B) the credit expired for individuals who began work after December 31, 2011. Thus, the credit is not available with respect to wages for persons who begin work after December 31, 2011, other than qualified veterans. The Act extended the credit only with respect to qualified veterans who begin work for the employer on or before December 31, 2012.

The Act amends Sec. 51(d)(3) to add two new categories to the qualified veteran targeted group. Under new Sec. 51(d)(3)(A)(iii) and (iv), a qualified veteran is a 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 or certified as having aggregate periods of unemployment of 6 months or more in the year prior to being hired.

The Act amends Sec. 51(c)(4)(B) to extend the credit and allow an employer to claim the WOTC for qualified wages paid or incurred by the employer to a qualified veteran who begins work on or before December 31, 2012.

The Act also amends Sec. 52 and Sec. 3111 to make a credit available to "qualified tax-exempt organizations" that hire qualified veterans for which the WOTC would have been allowable under Sec. 51 if the organization were not a qualified tax-exempt organization. Specifically, the Act adds new Sec. 3111(e), which permits qualified tax-exempt organizations that hire qualified veterans on or after November 22, 2011, to claim a credit against the employer share of social security tax imposed under Sec. 3111(a).

The amount of the credit can be substantial. It's equal to 25% of the qualified first-year wages for the applicable period if the veteran performs less than 400 hours but at least 120 hours of service and 40% of qualified first-year wages if he or she performs at least 400 hours of service. (Lower percentages apply to tax-exempt organizations.)

Who is considered a qualified veteran? To be considered a veteran, the individual must:

Have served on active duty (not including training) in the U.S. Armed Forces for more than 180 days or have been discharged or released from active duty for a service-connected disability, and
Not have a period of active duty (not including training) of more than 90 days that ended during the 60-day period ending on the hiring date.

In addition to the above the veteran is considered qualified for purposes of the credit if he or she is certified as:

A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a 3-month period during the 12-month period ending on the hiring date.
Unemployed for a period or periods totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
Unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces.
Entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.

The amount of wages that an employer may take into account in computing the credit differs for the various categories of qualified veterans. (See Amount of Credit, below for details.)

Note 1. The credit discussed here only applies to taxable entities. The credit is also available, but at different rates, to tax-exempt organizations.

Note 2. For additional details see:

Notice 2012-13
Expanded Work Opportunity Tax Credit Available for Hiring Qualified Veterans
VOW to Hire Heroes Act--Frequently Asked Questions and Answers.

Qualifying for the Credit

An employer must hire a veteran who is certified as being a member of a qualified veteran targeted group and who begins work before January 1, 2013. (For the two new categories of qualified veterans, the veteran must begin work on or after November 22, 2011, and before January 1, 2013.) In addition, a qualified veteran must work at least 120 hours for any credit to apply.

An employer must obtain certification that an individual is a qualified veteran in order to claim the credit. To obtain certification, an employer must:

1. Complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to pre-screen and to make a written request to their State Workforce Agency to certify an individual as a member of a targeted group for purposes of qualifying for the work opportunity credit. This form is not filed with the Internal Revenue Service; it is filed with the appropriate State Workforce Agency.
2. The state work opportunity tax credit coordinator for the State Workforce Agency must certify the job applicant is a member of a targeted group. For additional information, access the Department of Labor Employment and Training Administration (ETA) Web site.

Amount of Credit

The credit percentage varies depending on the time the veteran is employed and the category under which they qualify.