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Mary Bernard
Mary Bernard

Employers' Tax Credit for Hiring Veterans

The IRS issued guidance on the expanded work opportunity tax credits for unemployed veterans.

February 23, 2012
by Mary F. Bernard, CPA

On Feb. 9, the IRS issued Notice 2012-13, giving guidance to employers on two new tax credits for qualified veterans. The notice also provides employers extra time to comply with some of the credits’ requirements.

The credit allowed to employers for hiring individuals in targeted groups under the work opportunity tax credit (WOTC) was scheduled to expire as of Dec. 31, 2011. On Nov. 21, 2011, the Veterans Opportunity to Work to Hire Heroes Act of 2011 (VOW) was enacted as part of the Three Percent Withholding Repeal and Job Creation Act, P.L. 112-56, to create several veteran target groups eligible for a credit to businesses hiring these eligible unemployed veterans through the WOTC program. For the first time, this incentive is also available to tax-exempt organizations. As of this date, the extended deadline of Dec. 31, 2012, for the WOTC benefits only applies to the indicated veteran target groups. (For more on the credit, see Christian, “Hire a Hero, Enjoy the Benefits,” Corporate Taxation Insider (Dec. 8, 2011).)

The categories of eligible unemployed veterans include the following, with varying credits available ranging from $2,400 to $9,600:

  • Veterans receiving Supplemental Nutritional Assistance Program benefits;
  • Veterans with service-related disability;
  • Veterans with service-related disability and unemployed for at least six months;
  • Veterans unemployed at least four weeks;
  • Veterans unemployed for at least six months.

Certification Process

Before the WOTC can be claimed, on or before the day on which the individual begins work for the employer, the employer must receive a certification from a designated local agency that the individual is a member of a targeted group or, on or before the day on which the individual begins work for the employer, must complete a prescreening notice, Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Credit, and file the form not later than 28 days after the individual begins work for the employer with the designated local agency as part of a written request for certification.

In Notice 2012-13, the 28-day requirement is relaxed, allowing employers more time to file Form 8850. The IRS will treat an employer hiring a qualified veteran on or after Nov. 22, 2011, and before May 22, 2012, as satisfying the certification requirement if the completed Form 8850 prescreening notice is submitted to the designated local agency before June 19, 2012.

Tax-Exempt Organizations

VOW allows a qualified tax-exempt organization that hires qualified veterans on or after Nov. 22, 2011, to claim a credit against the employer’s share of Social Security tax imposed on the eligible veteran’s wages. A qualified tax-exempt organization is an organization described in Sec. 501(c)(3) and exempt under Sec. 501(a). The amount of the credit available is 16.25% of the qualified first-year wages for the applicable period if the veteran performs at least 120 hours of service but less than 400 hours. If the veteran performs at least 400 hours of service, the credit amount increases to 26% of the qualified first-year wages for the applicable period.

This credit is claimed on Form 5884-C, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans. Although the credit is applied against the employer’s Social Security tax liability, this form must be filed separately and not netted against the employment tax return liability.

The IRS recommends that required employment tax deposits should not be reduced in anticipation of the credit offset. Credits generated through the submission of Form 5884-C will be refunded to the taxpayer separately. The Form 5884-C may be filed immediately after the employment tax return and must be filed within two years from the date the tax reported on the employment tax return was paid, or within three years from the date the employment tax return was filed, whichever is later.

The calculation of the credit must be done on a cumulative basis for all qualified veterans hired on or after Nov. 22, 2011. The amount refunded will be limited to the amount of employer Social Security tax on the employment tax return for the tax period for which the credit is claimed. Any excess credit may be carried forward to the next filing period.

Filing Form 8850

In an attempt to streamline the certification process, the IRS will accept electronic submission and electronic signatures on Form 8850 under certain circumstances. Electronic submissions will be accepted if the employer’s system conforms to the requirements noted in Announcement 2002-44, issued previously. Notice 2012-13 also allows employers to use a hard copy of Form 8850 signed electronically by both the employer and the applicant or electronically by the applicant and in ink by the employer. The employer can submit the Form 8850 to the designated local agency by mail or by fax, if the designated local agency accepts the form by fax.

The Department of Labor has issued interim guidance and it is expected to issue further guidance to state workforce agencies to provide additional clarification of the implementation of the program.

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Mary F. Bernard, CPA, is director -- Income/Franchise Tax, at the Dallas-based tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, R.I.-based Kahn, Litwin, Renza & Co. Ltd.