The work opportunity credit provides businesses with an incentive to hire individuals from groups that have a particularly high unemployment rate or other special employment needs. Your business does not have to be in an empowerment zone, enterprise community, or renewal community to qualify for this credit. You can claim the credit if you pay or incur "qualified first-year wages" to a "targeted group employee."

At the time this publication was printed, this credit was set to expire for individuals who begin work for you after December 2001.

Targeted group employee. A targeted group employee is any employee who has been certified by your state employment security agency (SESA) as a:

1. Recipient of assistance under Temporary Assistance for Needy Families (TANF),
2. Veteran,
3. Ex-felon,
4. High-risk youth,
5. Vocational rehabilitation referral,
6. Summer youth employee,
7. Food stamp recipient, or
8. Supplemental security income (SSI) recipient.

The employee must meet the requirements explained in the instructions to Form 8850.

State certification required. An employee is not considered a targeted group employee without SESA certification. To receive certification, submit Form 8850 to your SESA.

You must either:

1. Receive the certification by the day the individual begins work, or
2. Do both of the following:
1. Complete Form 8850 by the day you offer the individual a job, and
2. Submit the form to your SESA by the 21st day after the individual begins work.

Qualified first-year wages. Qualified first-year wages are qualified wages you pay or incur for work performed by a targeted group employee during the 1-year period beginning on the date the individual begins work for you. Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each tax year for each employee ($3,000 each tax year for a summer youth employee).

If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $6,000 of that employee's wages subject to social security and Medicare taxes are qualified wages. For a special rule that applies to railroad employees, see section 51(h)(1)(B) of the Internal Revenue Code.

Nonqualified wages. See Form 5884 for a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages you pay or incur to an employee who:

1. Has worked for you for more than 1 year,
2. Is your relative or dependent,
3. You rehired, if he or she was not a targeted group employee when employed earlier, or
4. Does not work for you for at least 120 hours.

Amount of credit. The following table shows the rate you apply to qualified first-year wages you pay or incur each tax year to a targeted group employee who works the number of hours shown. The table also shows the maximum credit you can claim each tax year for each targeted group employee.

Table 2. Rate and Maximum Credit Each Tax Year
for Each Targeted Group Employee

Hours Worked	Rate	Maximum Qualified First-Year Wages	Maximum Credit
At least 400	40%	$6,000*	$2,400
Fewer than 400 but at least 120	25%	6,000*	1,500
*$3,000 for a summer youth employee

Claiming the credit. Use Form 5884 to claim this credit.

Effect on salary and wage deduction. In general, you must reduce the deduction on your income tax return for salaries and wages by the amount of your work opportunity credit.

Effect on empowerment zone and renewal community employment credits. Wages you use to claim the work opportunity credit cannot be used to figure the empowerment zone or renewal community employment credits. In addition, they reduce the maximum wage amount you can use to figure either of those credits.

Effect of welfare-to-work credit. You cannot claim both the work opportunity credit and the welfare-to-work credit for the same employee during the same tax year.

More information. For more information about the work opportunity credit, see Form 5884.

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