What Virginia Business Owners Need to Know About the IRS’ Work Opportunity Tax Credit

The Internal Revenue Service (IRS) recently announced that it has extended the federal work opportunity tax credit through 2025. Like the employee retention credit offered for 2020 and 2021, Virginia businesses claiming the work opportunity tax credit must be careful, as improperly claiming eligibility can lead to liability for back taxes, interest and penalties.

What Businesses Qualify for the Work Opportunity Tax Credit?

For 2022, the work opportunity tax credit is available to businesses that pay qualified wages to workers who are “certified as members of any of ten targeted groups facing barriers to employment.” Businesses must obtain certification on a worker-by-worker basis by filing IRS Form 8850, Pre-screening Notice and Certification Request for the Work Opportunity Credit, with the Virginia Employment Commission (VEC).

What Are the 10 “Targeted Groups?”

The 10 “targeted groups” covered by the work opportunity tax credit are listed in a September 7, 2022 Tax Tip published by the IRS. Virginia businesses may claim the credit for qualified wages paid to employees who are receiving:  

• Long-term family assistance
• Long-term unemployment
• Supplemental Nutrition Assistance Program (SNAP) benefits
• Supplemental Security Income (SSI) benefits
• Temporary Assistance for Needy Families (TANF) benefits

Businesses may also claim the credit for qualified wages paid to:

• Designated community residents living in Empowerment Zones or Rural Renewal Counties
• Disabled and other qualified unemployed veterans
• Formerly incarcerated individuals
• Summer youth employees living in Empowerment Zones
• Vocational rehabilitation referrals

What Are “Qualified Wages” for Purposes of the Work Opportunity Tax Credit?

The IRS explains that for purposes of the work opportunity tax credit, qualified wages “ha[s] the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA) (determined without regard to the $7,000 FUTA tax wage base).” Generally, qualified wages include compensation paid to employees who work at least 120 hours in the employer’s trade or business, provided that they have not worked for the business previously. There are other exceptions as well, including (but not limited to):

• Wages paid out of funds received from a federally funded on-the-job training program
• Wages paid to replacement employees during a strike or lockout
• Wages used to claim the coronavirus-related employee retention credit
• Wages used to claim the 2020 qualified disaster employee retention credit
• Wages used to claim the credit for qualified sick and family leave wages

How Do Businesses Claim the Work Opportunity Tax Credit?

Businesses can claim the work opportunity tax credit by calculating the credit amount using IRS Form 5884 and then submitting their completed Form 5884 with IRS Form 3800.

What Are the Risks of Improperly Claiming Federal Tax Credits?

For businesses that improperly claim federal tax credits such as the work opportunity tax credit, the risks can be substantial. Inaccurate filings can trigger IRS audits and investigations, and these inquiries can lead to civil or criminal penalties for businesses and their owners. As a result, business owners who have questions about their companies’ eligibility should consult with an experienced tax attorney prior to filing.

Discuss Your Virginia Business’ Tax Strategy with Attorney Kevin E. Thorn

If you would like to discuss your Virginia business’s tax strategy in confidence, we invite you to get in touch. To schedule an appointment with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 703-752-3752, email ket@thornlawgroup.com or contact us confidentially online today.