Welfare-to-Work Credit

The welfare-to-work credit provides businesses with an incentive to hire long-term family assistance recipients. 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 wages" during the first 2 years of employment to a "long-term family assistance recipient" who begins work for you after December 1997.

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

Long-term family assistance recipient. A long-term family assistance recipient is an individual who has been certified by your state employment security agency (SESA) as a member of a family that:

1. Has received assistance payments from Temporary Assistance for Needy Families (TANF) for at least 18 consecutive months ending on the hiring date,
2. Receives assistance payments from TANF for any 18 months (whether or not consecutive) beginning after August 5, 1997, and is hired not more than 2 years after the end of the earliest 18-month period, or
3. Stops being eligible after August 5, 1997, for assistance payments because federal or state law limits the maximum period that assistance is payable, and is hired not more than 2 years after that eligibility for assistance ends.

State certification required. An individual is not considered a long-term family assistance recipient 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 wages. Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $10,000 each tax year for each employee.

If the work performed by the employee during more than half of any pay period qualifies under FUTA as agricultural labor, the first $10,000 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 51A(b)(5)(C) of the Internal Revenue Code.

For this credit, qualified wages also generally include the following amounts paid or incurred by the employer that are normally excludable from the employee's gross income.

1. Amounts received for medical care under accident and health plans.
2. Employer-provided coverage under accident and health plans.
3. Certain amounts excludable under an educational assistance program, or that would be excludable but for the expiration of the exclusion. (At the time this publication was printed, this exclusion was set to expire for courses beginning after December 2001.)
4. Amounts excludable under a dependent care assistance program.

Nonqualified wages. See Form 8861 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 2 years,
2. Is your relative or dependent,
3. You rehired, if he or she was not a long-term family assistance recipient when employed earlier, or
4. Does not either:
1. Work for you for at least 180 days, or
2. Complete at least 400 hours of service.

Amount of credit. The following table shows the rate you apply to the qualified wages you pay or incur during each year of employment. The table also shows the maximum credit you can claim each tax year for each qualified employee.

Qualified first-year wages. Qualified first-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the date the individual begins work for you.

Qualified second-year wages. Qualified second-year wages are qualified wages you pay or incur for work performed by a long-term family assistance recipient during the 1-year period beginning on the day after the last day of the first-year wage period.

Claiming the credit. Use Form 8861 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 welfare-to-work credit.

Effect on empowerment zone and renewal community employment credits. Wages you use to claim the welfare-to-work 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 work opportunity credit. You cannot claim both the welfare-to-work credit and the work opportunity credit for the same employee during the same tax year.

More information. For more information about the welfare-to-work credit, see Form 8861.

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