Taxes can crush a business’s bottom line. Fortunately, the government has created a variety of tax credits to incentivize certain business decisions. In particular, eligible businesses can claim a credit for hiring military veterans. As such, we’ll use this article to explain how businesses can receive a tax credit for hiring veterans.
Specifically, we’ll discuss the following:
- Tax Credit vs. Tax Deduction
- The Work Opportunity Tax Credit
- Tax Credit for Hiring Veterans
- How to Claim the Credit
- Final Thoughts
Tax Credit vs. Tax Deduction
Before discussing the tax credit for hiring veterans, we’ll briefly clear up some tax-related confusion. While people frequently use the terms “credit” and “deduction” interchangeably, they mean two different things. Yes, both reduce your taxes, but they do so separately. Whereas a tax deduction reduces your taxable income, a tax credit reduces the actual tax you owe in a dollar-for-dollar amount.
For example, assume your business has $100,000 in taxable income. A $5,000 deduction would reduce your taxable income by $5,000. As a result, you’d calculate your tax liability based on $95,000 in income – not $100,000. Assume you have an effective tax rate of 20% (round numbers for the sake of simplicity). This $5,000 deduction would save you $1,000 in taxes ($5,000 deduction x 20% tax rate).
Conversely, assume you have that same $100,000 in taxable income, and it leads to $20,000 in tax liability (i.e. taxes you actually need to pay). A $5,000 tax credit would reduce your $20,000 tax bill by $5,000. Instead of owing $20,000, you’d only owe $15,000. While the $5,000 deduction in this example saved you $1,000, the $5,000 credit saved you the entire $5,000. Accordingly, tax credits tend to offer far more benefit to business owners than tax deductions, which is why this tax credit for hiring veterans provides such an outstanding opportunity.
The Work Opportunity Tax Credit
Of note, no official “Tax Credit for Hiring Veterans” program exists. Rather, the IRS administers the veteran-related credit through its Work Opportunity Tax Credit (WOTC) program. More precisely, the WOTC serves as a federal tax credit available to employers who hire individuals from certain targeted groups. These groups have faced consistent and significant barriers to employment, and they include veterans.
Conceptually, the WOTC provides an incentive to hire individuals from these targeted groups. By offering a way to reduce their tax bill, this credit encourages businesses to support the needs of historically disadvantaged American workers. And, recognizing the importance of this mission, Congress recently extended the WOTC through the end of 2025.
Tax Credit for Hiring Veterans
As stated, the WOTC offers employers a tax credit for hiring employees from a variety of targeted groups. But, due to the potential for abuse, the IRS outlines strict rules for which employees do and do not qualify. From the perspective of hiring veterans, the IRS defines a “qualified veteran” as a veteran meeting any one of the below criteria:
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
- Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
- Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
- A disabled veteran entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
- A disabled veteran entitled to compensation for a service-connected disability who is unemployed for a period totaling at least six months (whether or not consecutive) in the one-year period ending on the hiring date.
Potential Tax Savings
Assuming a new veteran hire meets one of the above criteria, employers can claim a credit based on the qualified wages of these new hires. As with many IRS-related issues, no universal tax savings exists. That is, the IRS doesn’t say that, if you hire veterans, we’ll provide you a $#### tax credit. Rather, the size of the credit depends on the business itself and which of the above veteran eligibility criteria a new hire meets.
A tax professional can help your business calculate potential savings for your unique situation. But, it’s important to note that, according to the IRS, the [veteran tax] credit is limited to the amount of the business income tax liability or Social Security tax owed. Businesses can owe tens of thousands of dollars (or more) in these taxes, meaning that you can potentially save a ton of money on your tax bill by hiring veterans.
How to Claim the Credit
As discussed, employers should absolutely work with a tax professional to claim the tax credit for hiring veterans. First, a professional will ensure you don’t make any mistakes when you file. Second, tax professionals will make sure you maximize your potential tax credit, as you don’t want to leave money on the table.
Having said that, here’s a general overview of the process to claim the credit:
Step 1: Pre-screening and Certification
Before claiming a credit, employers need to obtain certification that a veteran does, in fact, meet one of the above qualifying criteria. To do so, employers file Form 8850, Pre-Screening Notice and Certification Request for Work Opportunity Credit with their respective state workforce agency. Employers must file this form within 28 days of the eligible veteran beginning work.
Step 2: Claim the Credit
After confirming the above certification, employers claim the veteran credit as a general business credit against their income tax. To do this, employers must file the following two forms with their annual tax return:
- Form 3800, General Business Credit
- Form 5884, Work Opportunity Credit
Step 3 (As Required): Carrying the Veteran Tax Credit Forward or Back
The WOTC is not a refundable credit. This means that employers will never receive cash back as a result of claiming this credit. Rather, if your tax credit exceeds your actual tax bill, you can:
- Carry forward the unused tax credits for up to 20 years, and/or
- Carry back the unused tax credits one year
Final Thoughts
The tax credit for hiring veterans provides employers an opportunity to hit the proverbial “two birds with one stone.” From a financial perspective, this credit can save you a ton of money on your business’s tax bill. And, from a social perspective, hiring veterans helps a group of people that have already sacrificed so much for our country.
Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.
