For many years, the tax law has encouraged employers to hire disadvantaged workers by providing tax credits. An employer who hired a worker from a targeted group qualified for a tax credit that could reach $2,400 (40% of the first $6,000 of wages in the 12-month period after hire).
But in the past, these targeted groups have been limited to welfare recipients, inner-city youth, ex-felons and similar categories that were probably not high on your employment radar.
The recent Small Business Act of 2007 has expanded one of these targeted categories in a manner that will reach many rural and agricultural employers.
The new category is labeled "designated community residents." These are individuals who have attained age 18 but not age 40 on the hiring date, and reside within a rural renewal county. This is defined as a county outside a metro area that lost population during the 1990s. Page 4 of the IRS instructions for Form 8850 identifies the counties within each state that qualify. For this list, go to the IRS web site at www.irs.gov, and click More Forms and Publications.
FOLLOW CRITERIA. There is an important additional criterion beyond the new employee's county of residence: a rigid certification deadline. Employers have only 28 days after the date of hire to submit a certification request to their state workforce agency.
IRS Form 8850, "Pre-Screening Notice and Certification Request for the Work Opportunity Credit," is used for this purpose. The state agency certifies the employee's eligibility, which then allows the employer to claim an income tax credit using IRS Form 5884, "Work Opportunity Credit."
A key aspect of this new credit is that all employees qualify, assuming the proper county of residence and age of the employee, and timely certification by the employer. The worker does not need to be a low-income or entry level, but could be a highly paid or managerial employee.
The worker cannot be a related party nor someone previously employed by the business. Wages must be subject to payroll taxes (commodity wages would not count). And the employee must continue to reside in the rural renewal county for the wages to count for the credit.
Finally, the individual must be employed at least 400 hours to use the maximum 40% rate in calculating the credit. If the individual is employed less than 400 hours but more than 120 hours, a lower 25%-of-wages rate applies in calculating the tax credit.
ADDED TAX ADVANTAGES. The credit will actually save tax. In a related law change, Congress now allows these Work Opportunity Credits to offset both regular income tax and alternative minimum tax. This makes these jobs credits even more lucrative than in the past, so eyes open for those "rural renewal county" residents when hiring.