Tax Credits

Overcome common WOTC screening challenges to optimize management and increase savings while helping disadvantaged individuals find employment.

On September 19, 2022, the IRS published a news release regarding the Work Opportunity Tax Credit (WOTC), “IRS updates Information on tax credit helping businesses to hire certain categories of workers.” We previously noted that information on the IRS WOTC FAQ page was updated from: Pre-screening and Certification. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. To the following IRS WOTC revised text: An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. The Targeted Jobs Tax Credit (TJTC), which preceded WOTC, did not contain a pre-screening requirement. In enacting WOTC to replace the TJTC in 1996, Congress included the requirement that employers pre-screen job applicants before or on the same day the job offer is made. In doing so, Congress emphasized that the WOTC is a subsidy designed to incentivize the hiring and employment of individuals who are members of targeted groups. On page two of Form 8850, there are four dates that must be provided before Form 8850 can be submitted to a SWA. They are the dates that the job applicant Gave information, Was offered job, Was hired, and Started the job. To confirm that the employer pre-screens the job applicant, and obtains information provided by the job applicant on the basis of which the employer believes that the job applicant is a member of a targeted group, the date the applicant Gave information about being a targeted group member must be a date that is the same as, or before the date the applicant Was offered job. The dates that the job applicant Was hired and Started the job must be on or after the dates the applicant Gave information and Was offered job. Form 8850 including the dates entered on page two of Form 8850, must be signed under penalties of perjury and must be submitted to the SWA (or postmarked, if mailed) no later than 28 days after the date that the job applicant Started the job. A number of commentators have given the impression that this update reflects a new policy or a change of the WOTC program’s process with statements such as, “The IRS has updated the prescreening process for new hires.” In fact, the IRS is itself giving this impression by repeatedly tweeting a graphic that says, “The IRS has updated the pre-screening and certification process for the Work Opportunity Tax Credit.” Has the IRS Changed Anything About WOTC? No. The update has merely emphasized and more fully articulated rules that have been in the Internal Revenue Code since the inception of WOTC. WOTC was created by Section 1201 of the Small Business Job Protection Act of 1996 (P.L. 104-188), and signed into law by President Clinton on August 20, 1996. While the law has been amended and extended numerous times since then, the very first version included the following requirement, which has remained unchanged through every subsequent iteration: Special rules for certifications. -- (A) In general.--An individual shall not be treated as a member of a targeted group unless-- (i) on or before the day on which such individual begins work for the employer, the employer has received a certification from a designated local agency that such individual is a member of a targeted group, or (ii)(I) on or before the day the individual is offered employment with the employer, a pre-screening notice is completed by the employer with respect to such individual, and (II) not later than the 21st day after the individual begins work for the employer, the employer submits such notice, signed by the employer and the individual under penalties of perjury, to the designated local agency as part of a written request for such a certification from such agency. The only change to this section of the statute occurred in the Tax Relief and Health Care Act of 2006 (P.L. 109-432), in which Congress extended the paperwork filing deadline from 21 days to 28. This consistency is evident on the pre-screening form itself, IRS Form 8850. The earliest version of that form from 1996 includes the following jurat above where the form requires a job applicant’s signature: “Under penalties of perjury, I declare that I gave the above information to the employer on or before the day I was offered a job, and it is, to the best of my knowledge, true, correct, and complete” (emphasis added). This statement is identical to that found on the most current version of the form. The IRS did not include an explanation for why it decided to “update” its WOTC information with information as old as the program, but such an update indicates a concern that some may be misunderstanding this basic requirement. To learn more about solutions for capturing WOTC and other tax credits, visit Experian Employer Services.

Skilled nursing facilities have tended to avoid the employee retention credit because of its complexities, despite likely meeting eligibility requirements.

Before filing a claim for the ERC, employers should fully understand its background and best practices to prepare for a possible IRS ERC audit.

The Work Opportunity Tax Credit program (WOTC) has been around for several decades, yet many employers are still not aware of its features and benefits. By hiring from a pool of eligible employees and applying for this voluntary program, employers claim over $1 billion in tax credits every year. To optimize a WOTC program, it's important to fully understand Form 8850. Per employee, the tax credits can reach up to $9,600, giving employers a reason to hire someone less skillful and experienced as compared to other applicants. In other words, they can benefit by hiring the eligible individuals belonging to one of the vulnerable target groups. The entire WOTC process is designed with simplicity in mind and includes completing two easy forms, mailing them off to a State Workforce Agency, and receiving a certification in return, thus allowing the claiming of the WOTC credits to begin. Still, millions of dollars in available tax credits go unclaimed each year due to incomplete or inefficient WOTC screening. To prevent this, employers need to understand how the WOTC program works, Form 8850 as well as other documentation necessary for WOTC certification. What Is Form 8850 Used For and How Do Companies Qualify? One of the essential tools in the implementation of WOTC is Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. The IRS designed it to streamline the screening and certification process for hiring qualified individuals belonging to target groups as defined by the program. Prior to making an employment offer, the employer needs to obtain information about the job applicants’ WOTC eligibility status. They are asked to self-identify as members of one of the following eligible groups:  Qualified veteran; Qualified IV-A recipient; Qualified ex-felon, Designated community resident; Vocational rehabilitation referral; Summer youth employee; Supplemental nutrition assistance program (SNAP) recipient; Supplemental Security Income (SSI) recipient; Long-term family assistance recipient; and Qualified long-term unemployment recipient. Minimum Hours for Targeted Groups and Analyzing Screening Compliance While there is no limit to the number of workers an employer can hire to qualify for WOTC, there is a cap on the credit per individual. This amount varies for each WOTC target group. Credit accumulation begins once an employee works a minimum of 120 hours. The credit continues to accumulate until the employee works a certain number of hours that maximizes the credit – for many credit categories that number ranges from 400-500 hours. Employers can also improve their WOTC benefits by improving their standard screening compliance rate. A company that hires 3,000 employees annually and has a screening compliance rate of 80% (i.e. 8 out of 10 applicants complete the WOTC Survey) may earn, for example, $150,000 or more per year by claiming WOTC. There are a few factors that impact Credits Earned including the type of industry, the Applicant Tracking System, Average Credit Certified and the Eligibility Rate. Compliance Requirements It is important to note that some applicants may be concerned about having to answer the personal questions on the WOTC certification forms. This can cause employers not to include WOTC screening into the hiring process in an effort to keep the number of applicants higher. However, any employer participating in the WOTC program is protected against any discriminatory claims or lawsuits for asking the questions on WOTC screening and application forms. At the same time, employers need to remember that applicants give the required information on or before the day a job offer is made. If they determine that an applicant is a member of a target group, employers complete the rest of the form 8850 no later than the day the job offer is made. Both the applicant and the employer must sign Form 8850 no later than the date for submitting the form to the SWA. Not complying with this requirement can expose employers to an IRS audit and the repayment of credits obtained in a non-compliant manor. Recently, the IRS has increased its audit capacity by hiring of 87,000 new agents. This challenge can be solved with automated WOTC management solution fully compatible with the WOTC process. Streamlined pre-employment screening improves the user experience and simplifies the process resulting in a higher application completion rate and an increase in tax credits. Misconceptions The WOTC represents a powerful incentive for employers, offering significant savings in tax credits. When selecting from a qualified applicant pool, considering applicants who will provide maximum tax savings to the organization is a smart and far-sighted business decision. However, many employers are reluctant to enter this procedure due to fears of discrimination claims stemming from the nature of questions posed in the form. This apprehension could be a big roadblock to ttaking full advantage of the WOTC program. Benefits of Outsourcing WOTC and Capturing Savings with Form 8850 In the current complex and unpredictable marketplace, every responsible employer is looking for different ways to maximize profit and ensure savings wherever possible. The WOTC program is one of the clear-cut ways to enable tax credit savings and, while demonstrating corporate social responsibility, empower the individuals belonging to targeted groups by hiring them. Form 8850 has a clear intent and design to streamline the procedure in compliance with the relevant legislation. The businesses not yet taking advantage of the WOTC program ultimately fail to secure available tax savings and lose out to competitors who do. Misconceptions are what stand between an employer and these savings rather than real reasons to avoid it. Yet, understanding Form 8850, as well as the safeguards built into it, allow employers a successful implementation of the available WOTC credits without any fear of possible discrimination against employees. It is undeniable that there are challenges to this process, which may seem overwhelming and take up valuable time and resources. However, an effective electronic WOTC platform is an obvious solution - enabling employers to capture available tax credits while remaining compliant. In addition to helping applicants complete WOTC forms quickly and correctly, employers can stay compliant with the necessary requirements, eliminate errors and meet WOTC screening deadlines. Through this transition, they streamline the procedure, reduce its length and secure another best practice in business, reaping the benefits along the way. Automate WOTC management to simplify the process, ensure compliant pre-screening, streamline the forms necessary for certification and identify more eligible applicants resulting in efficient capture of available tax credits.

Some tax advisors are misstating the rules related to deadlines for Employee Retention Credit (ERC) claims. They may say that amendments can be filed up to three years from each quarterly payroll tax filing date, resulting in a separate deadline to apply for the ERC for each calendar quarter. They say, for example, that the deadline to amend the second quarter of 2020 is July 31, 2023 (i.e. three years from the filing deadline of 7/31/2020). In one instance, an advisor claims that, “The ERTC deadline is March 12th, 2023.” Others are making the erroneous statement that, “The program could run out of allocated funds at anytime [sic],” while also urgently warning, “Time is of the essence.” What are the actual deadlines for filing an ERC claim? There are only two deadlines: For all quarters in 2020, the deadline to apply for the ERC is April 15, 2024, and for all quarters in 2021, the deadline is April 15, 2025. Download our ERC White Paper The ERC can only be filed using an IRS Form 941-X, “Adjusted Employer's quarterly Federal Tax Return or Claim for Refund.” A separate 941-X will be filed for each calendar quarter for which ERC is being claimed. While original Forms 941 are due by the last day of the month that follows the end of each quarter, and amendments to federal tax returns generally need to be filed within three years of the original due dates, 941-X amendments are a little different. The instructions to Form 941-X state: Is There a Deadline for Filing Form 941-X? Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later. You may correct underreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date the Form 941 was filed. We call each of these time frames a “period of limitations.” For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date. That last sentence is the key, “For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.” This rule is derived from Section 6513 of the Code in which subsection (c) “Return and payment of Social Security taxes and income tax withholding,” includes the rule that, “(1) If a return for any period ending with or within a calendar year is filed before April 15 of the succeeding calendar year, such return shall be considered filed on April 15 of such succeeding calendar year.” This means that while the Form 941 for the second quarter of 2020 was originally due on 7/31/2020; the third quarter was due on 10/31/2020; and the fourth quarter was due on 1/31/2021, all of those returns are considered filed on 4/15/2021, setting the three-year statute of limitations for amending any of those returns as 4/15/2024. (The instructions to Form 941-X explain, “any corrections to the employee retention credit for the period from March 13, 2020, through March 31, 2020, should be reported on Form 941‐X filed for the second quarter of 2020.”) All of this being said, it’s not advisable to wait until the very end. Learn more about our solutions for tax credits including the ERC.

There are several updates for employer tax credit programs in recent weeks relevant to businesses. These include an explanation from the IRS Chief Counsel on the proper treatment of improperly forgiven PPP loans, an update from a coalition of nonprofits seeking a retroactive restoration of the Employee Retention Credit (ERC), and new guidance from the IRS on the Work Opportunity Tax Credit (WOTC). IRS Chief Counsel Memo: Proper Treatment of Improperly Forgiven PPP Loans A new Chief Counsel memo dated August 19, 2022, explains that while Congress excluded forgiven PPP loans from gross income in the Consolidated Appropriations Act, 2021 (Pub. L. 116–260), if forgiveness was obtained despite not meeting the requirements for that forgiveness, the loan proceeds should then be included in gross income. They conclude: “If a taxpayer who does not factually satisfy the conditions for a qualifying forgiveness causes its lender to forgive the PPP loan by inaccurately representing that the taxpayer satisfies them, the taxpayer may not exclude the amount of the forgiven loan from gross income under 15 U.S.C. § 636m(i) or section 276(b)(1) of the CTRA 2020.” PPP loans were administered through the Small Business Administration (SBA), and IRS does not have direct jurisdiction over the issues involving the loans or their forgiveness. However, this aspect of taxable income treatment enables the IRS to get involved in the PPP loan forgiveness area. For taxpayers who took advantage of both the PPP and ERC programs, there is also a tax implication, namely the proper interaction of forgiven PPP loan funds and ERC qualified wages. This gives the IRS yet another angle to investigate the proper use of PPP loan funds. Nonprofits Reiterate Request to Restore ERC A coalition of nonprofit organizations have updated and resent their letter to President Biden and Congressional leaders. The update, dated September 13, 2022, includes their request “to retroactively restore the Employee Retention Tax Credit, as proposed in the bipartisan ERTC Reinstatement Act (H.R. 6161/S. 3625), extend this refundable payroll tax credit through 2022, and modify nonprofit eligibility beyond the current ‘gross receipts’ test and definition of eligible payroll expenses to include child care and education subsidies.” There does not appear to be any serious discussion in Congress to extend this employer tax credit program. IRS Updates WOTC Guidance A press release from the IRS alerts taxpayers to an update of their WOTC information webpage. As noted in the press release, the new information includes an emphasis on the pre-screening requirement that has been part of the program since its inception in 1996. It is interesting that IRS is choosing to highlight and reiterate rules that have always existed. Prior to the update, the relevant text read: Pre-screening and Certification. An employer must obtain certification that an individual is a member of the targeted group, before the employer may claim the credit. An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their respective state workforce agency within 28 days after the eligible worker begins work. Employers should contact their individual state workforce agency with any specific processing questions for Forms 8850. The revised text reads: Pre-screening and Certification An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that an employee is a member of a targeted group to claim the credit. To satisfy the requirement to pre-screen a job applicant, on or before the day that a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer. The Targeted Jobs Tax Credit (TJTC), which preceded WOTC, did not contain a pre-screening requirement. In enacting WOTC to replace the TJTC in 1996, Congress included the requirement that employers pre-screen job applicants before or on the same day the job offer is made. In doing so, Congress emphasized that the WOTC is a subsidy designed to incentivize the hiring and employment of individuals who are members of targeted groups. On page two of Form 8850, there are four dates that must be provided before Form 8850 can be submitted to a SWA. They are the dates that the job applicant Gave information, Was offered job, Was hired, and Started the job. To confirm that the employer pre-screens the job applicant, and obtains information provided by the job applicant on the basis of which the employer believes that the job applicant is a member of a targeted group, the date the applicant Gave information about being a targeted group member must be a date that is the same as, or before the date the applicant Was offered job. The dates that the job applicant Was hired and Started the job must be on or after the dates the applicant Gave information and Was offered job. Form 8850 including the dates entered on page two of Form 8850, must be signed under penalties of perjury and must be submitted to the SWA (or postmarked, if mailed) no later than 28 days after the date that the job applicant Started the job. Some individuals have a Conditional Certification (DOL-ETA Form 9062) issued by partnering agencies or SWAs. Employers can contact their SWAs for more information on Conditional Certifications. If an employer does not receive a certification on or before the day that the individual begins work, the employer must request certification by submitting Form 8850, to the SWA of the state in which their business is located (where the employee works) within 28 days of the individual beginning work. Employers should contact their SWA with any specific processing questions for Form 8850. Experian Employer Services tax experts regularly monitor and track updates to employer tax credit policies. Learn more about our tax credit solutions here.

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