Does Your Massachusetts Business Qualify for the IRS’ Work Opportunity Tax Credit?

The Internal Revenue Service (IRS) recently extended the federal work opportunity tax credit through 2025. This credit allows businesses to reduce or eliminate their federal income tax liability by hiring workers in 10 “targeted groups.” For businesses that qualify, claiming the work opportunity tax credit can offer substantial financial benefits. However, qualifying businesses must be careful to claim the credit correctly, as the IRS has recently enhanced its scrutiny of businesses (and individuals) claiming tax benefits under these types of federal relief programs.

4 Requirements for Claiming the Work Opportunity Tax Credit in 2022

Currently, there are four main requirements for businesses to claim the work opportunity tax credit on their federal income tax returns. For 2022, the requirements are:

1. Hiring Workers in 10 “Targeted Groups”

To claim the credit, businesses must hire workers who are “certified as members of any of ten targeted groups facing barriers to employment.” These “targeted groups” are:

• Designated community residents living in Empowerment Zones or Rural Renewal Counties
• Formerly incarcerated individuals
• Long-term family assistance recipients
• Long-term unemployment recipients
• Qualified unemployed veterans
• Summer youth employees living in Empowerment Zones
• Supplemental Nutrition Assistance Program (SNAP) recipients
• Supplemental Security Income (SSI) recipients
• Temporary Assistance for Needy Families (TANF) recipients
• Vocational rehabilitation referrals

2. Obtaining Certification from MassWorkforce

Prior to claiming the work opportunity tax credit, businesses must obtain certification for each individual covered employee. This is done by submitting IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, to MassWorkforce. The IRS advises that businesses should file Form 8850 “within 28 days after [an] eligible worker begins work.”

3. Accurately Calculating the Credit for Each Eligible Worker

Businesses seeking to claim the work opportunity credit must accurately calculate the credit for each individual worker. This is done using IRS Form 5884, Work Opportunity Credit. When completing Form 5884, businesses must include only eligible employees’ “qualified wages.” Exclusions from “qualified wages” are identified in the Instructions for Form 5884.

4. Correctly Applying the Credit to the Business’s Federal Income Tax Liability

Businesses in Massachusetts can claim the work opportunity tax credit in an amount up to their federal income tax liability for the relevant tax year. As the IRS explains, “Any credit remaining above the [business’s] income tax liability is subject to the normal carry-back and carry forward rules.”

Risks of Improperly Claiming the Workforce Opportunity Tax Credit

While businesses that qualify for the workforce opportunity tax credit can substantially reduce or eliminate their federal income tax liability, improperly claiming the credit can trigger an IRS audit or investigation. These inquiries can lead to substantial penalties for businesses and their owners—up to and including criminal fines and imprisonment in cases involving allegations of intentional tax evasion.

Request a Confidential Consultation with Tax Attorney Kevin E. Thorn

If you have questions or concerns about claiming the work opportunity tax credit in 2022, we encourage you to schedule an initial consultation. To request an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, in confidence, please call 617-692-2989, email ket@thornlawgroup.com or tell us how we can help online today.