Employment Opportunity Tax Credit

Businesses that hire an individual who is receiving Aid to Families with Dependent Children (AFDC) or Family Investment Program (FIP) entitlements may be entitled to a tax credit for wages paid to the employee and for child care and transportation expenses paid on behalf of the employee. The credit may be claimed for individuals hired before July 1, 2008.

The credit may be taken against corporate income tax, personal income tax, state and local taxes withheld (for certain tax-exempt organizations only), insurance premiums tax or public service company franchise tax. The same credit may not, however, be applied to more than one tax type.

Sole proprietorships, corporations, tax-exempt nonprofit organizations and pass-through entities, such as partnerships, subchapter S corporations, limited liability companies and business trusts may claim the tax credit.

To qualify for the credit:

The company must hire at least one employee that received AFDC or FIP payments for any three months during the 18-month period before employment by the company. The employee cannot be closely related to the owners of the business.

Certification must be obtained from the Department of Labor, Licensing and Regulation that the individual is a qualified employee.

How the credit is calculated:

The credit is allowed for the first two years of employment of the individual for both the wages paid and the child care or transportation expenses paid on behalf of the employee as follows:

First year

Wages: 30 percent of the first $6,000 paid in the first year (a maximum allowable credit of $1,800).
Child care or transportation expenses: Up to $600 of expenses paid in the first year.

Second year

Wages: 20 percent of the first $6,000 of wages paid in the second year (a maximum allowable credit of $1,200).
Child care or transportation expenses: Up to $500 of expenses paid in the second year.

If the employee has been a recipient of AFDC or Temporary Cash Assistance for any 18 months during the last 48 months and is employed by the business for a full year, the credit increases to 40 percent of the first $10,000 of wages paid to the employee during the first year of employment. The credit for child care or transportation expenses may also be taken for the first and second years as shown above.

If the credit is more than the state tax liability, the unused credit may be carried forward for the next five tax years.

A tax-exempt organization may estimate the amount of the tax credit for qualifying employees for the taxable year. The total amount of the estimated credit should be divided evenly over the number of periods for filing withholding returns (Form MW506). For example, if quarterly returns are required, then the total estimated credit should be divided by four. Each payment to the Comptroller would be reduced by the pro rata amount of the credit.

Alternatively, the tax-exempt organization could apply the credit against the tax on unrelated business taxable income.

Documentation required:

Corporate income tax:

Form 500CR must be completed and submitted with the income tax return (Form 500).

Personal income tax:

Form 500CR must be completed and submitted with the income tax return (Form 502 or 505). If the business is a pass-through entity, Form 500CR must be prepared for the pass-through entity and submitted with the entity's income tax return (Form 510). A modified federal Schedule K-1 provided by the pass-through entity to its members must separately state their shares of the credit. Individuals or entities must attach this statement to the Form 500CR submitted with their personal (Form 502 or 505), corporate (Form 500) or pass-through entity (Form 510) income tax returns.

State and local income taxes withheld:

Form 500CR must be submitted with Form MW 508, the Maryland Annual Employer Withholding Reconciliation Report.

Insurance premiums tax:

Documentation of the credit shall be maintained by the taxpayer in their files and be made available to the Insurance Commissioner, on request, in accordance with COMAR 31.06.04.03. The documentation should include documents from the agency granting the credit and a list of the names and telephone numbers for the taxpayer's staff who are directly involved in granting the credits. All information shall be retained for a minimum of three years from the date of the filing of the final tax return on which the credit is taken.

Public service company franchise tax:

Form AT3-74 must be submitted with the franchise tax return (SDAT forms 11 or 11T).

For more information, contact:

David Ghee
Maryland Department of Labor, Licensing and Regulation
Division of Employment and Training
1100 N. Eutaw Street
Baltimore, MD 21201
Phone: 410-767-2080
E-mail: ghee@careernet.state.md.us