IRS Offers Guidance on Tax Credit for Hiring Veterans
Posted March 1, 2012
The IRS recently issued additional guidance for the Work Opportunity Tax Credit (WOTC), which was enhanced last year for employers who hire qualified veterans. The new guidelines extend the former 28-day deadline for submitting new veteran hires’ certification, and provide details on how tax-exempt organizations can apply for the credit.
“These new credits for hiring veterans are some of the largest in the array of WOTC categories,” notes Rob Nowak, a tax partner with CliftonLarsonAllen. “And the extended time to get the paperwork filed means that employers should review their recent hires for credit opportunities.”
Extended certification process
To claim the WOTC, an employer must generally submit a pre-screening notice (IRS Form 8850) requesting certification from its state employment agency no later than the 28th day after the employee begins work. With the enactment of the expanded tax credit for hiring veterans in 2011, this deadline did not allow employers hiring qualified veterans much time to learn about the opportunity, submit the application for certification, and claim the credit.
Consequently, the IRS and the U.S. Department of Treasury are providing transitional relief to employers that hire qualified veterans on or after November 22, 2011, and before May 22, 2012. These employers will become eligible to receive the tax credit if they submit Form 8850 to their state employment security agency by June 19, 2012. Employers also now have additional methods by which they can submit the Form 8850 to the state agency; see the new guidelines (IRS Notice 2012-13) for the details.
“This transitional relief provides a great opportunity to claim the tax credit for employers who may have been either unaware of the law change, or perhaps simply missed the fact that a new hire was a qualified veteran,” says Karen Gries, a nonprofit and government partner with CliftonLarsonAllen. “All employers should review the files of those hired since late November 2011, and identify any who may have prior military active duty.”
New procedure for tax-exempt employers
Last year’s legislation opened a new door by allowing tax-exempt employers to claim the tax credit for new hires who are qualified veterans. However, nonprofits normally do not have any use for a tax credit that offsets income tax. The legislation states that nonprofits can claim a credit for the amount of the employer’s social security taxes (but not Medicare taxes) on their wages for the 12 month period after they are hired.
The guidelines clarify that tax-exempt employers do not claim the credit on their quarterly IRS Form 941 payroll tax form. Instead, they need to file IRS Form 5884-C to claim the credit and request a refund of social security taxes paid. Form 5884-C is a quarterly form, matching the time periods for which Form 941 is filed for payroll taxes. The IRS says employers should not reduce their required payroll tax deposits in anticipation of a credit. Instead, the IRS will refund any overpayments to employers, based on the amount of credit properly claimed.
Form 5884-C is filed separately after the employer files Form 941 for the tax period for which the credit is claimed. Employers must file 5884-C within two years after they paid taxes or three years after they filed Form 941.
“Nonprofits have not dealt with these hiring incentive tax credits in the past,” says Gries. “They should enhance their employment procedures to assure that any veteran tax credit opportunities are not overlooked.”
How we can help
The extension and enhancement of the WOTC for qualified veterans provides time and additional incentive for employers — including tax-exempt organizations — to add qualified veterans to their payrolls. The new veteran credits were effective last November upon enactment, allowing little time for employers to react and obtain the tax benefit. The new procedure gives employers additional time to begin the certification process. Your tax advisor can help you interpret these provisions and apply them to your tax filings.