Businesses like restaurants and retail can struggle to build up a necessary workforce to meet their needs, especially during high-demand seasons like the summer and holidays. This additional hiring can also bring higher employment costs. The federal government and a number of states offer tax incentives to encourage businesses to hire new employees and offset these hiring costs, especially when they target specific groups of the unemployed. For example, by using the Work Opportunity Tax Credit (WOTC), companies can receive up to $9,600 in federal tax credits for certain employees who are hired. However, any additional steps in the hiring process may be seen as a barrier for the candidate to complete the hiring process, hurting an employers goal of building up their workforce when they need it most. This guide can help employers better understand how to apply for WOTC while maintaining a simple hiring process to capture available tax credits.
Work Opportunity Tax Credit Overview
WOTC is a federal program that has been around for over 25 years. It belongs to a group of temporary tax incentives that Congress typically extends annually, but in 2020, the Consolidated Appropriations Act (CAA) extended the credit through 2025.
The value of WOTC is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned in the period of employment. There is no limit to the amount of tax credits a business can earn from WOTC, but applicants must be new hires.
WOTC is a voluntary program. Employers may not require new hires to provide the necessary information, but it is advisable to include this in the onboarding process and apply for WOTC whenever possible.
WOTC is also considered to be an underutilized program, but the COVID-19 pandemic impacted businesses and employees from all industries. With an increase in the number of WOTC-eligible employees, companies that otherwise would not qualify were given an opportunity to apply for WOTC, benefit from this program and mitigate the negative effects of the pandemic.
How to Apply for WOTC?
Employers must request and receive certification from their State Workforce Agency (SWA) that the new hire is a member of one of the WOTC target groups before they can claim the Work Opportunity Tax Credit on their federal tax return.
To apply for WOTC certification, employers must:
- Complete the IRS Form 8850, Prescreening Notice and Certifications Requests for the Work Opportunity Tax Credits, by having the new hire fill out page 1 prior to the date of the job offer and the employer complete page 2;
- Have new hires complete one of the following U.S. Department of Labor forms, as appropriate:
- IRS Form 9061, Individual Characteristics Form, or
- IRS Form 9062, Conditional Certification Form.
- Mail the completed and signed forms to the SWA within 28 days of the start date.
Supporting documentation can be sent at a later date, however, it is important for the employer to collect necessary documentation from the individual at the time of hire.
How to Calculate WOTC Credits?
If an employer hires an eligible employee from a target group, a federal tax credit is available at the end of the year. The actual WOTC amount employers receive from each employee is equal to 25% to 40% of the employee’s wages. Also, the employee must work for a minimum of 120 hours, the equivalent of 3 full-time weeks, in order to receive any portion of the tax credit.
The actual percentage of WOTC credits is calculated based on the number of hours employees work, with a maximum limit on eligible wages. For example, employers can receive a tax credit of 25% of the employee’s wages if they work at least 120 hours. That percentage increases to 40% if the employee works at least 400 hours. WOTC’s main goal is to encourage employers to hire and retain those who may struggle to gain employment. Therefore, the more such employees are allowed to work, the bigger the tax credit for employers.
Maximum WOTC credit amounts available are:
- Long-Term Unemployed Individuals – $2,400;
- SNAP Benefits Recipients – $2,400;
- TANF Benefits Recipients – $2,400;
- Supplemental Security Income Recipients – $2,400;
- Ex-Felons – $2,400;
- Summer Youth program participants, ages 16-17 who are employed between May-Sep 15 and live in a designated community area – $1,200;
- Designated community residents – $2,400;
- Vocational rehabilitation referrals – $2,400;
- Long-Term Family Assistance recipients who are members of a family that has received TANF benefits for at least 18 consecutive months – $9,000;
- Veterans with a service-connected disability and have been employed for 6+ months in the past year – $9,600; and
- Other veteran target groups – from $2,400 to $5,600.
Apply for WOTC and Maximize Benefits
WOTC is frequently described as a win-win opportunity for employers and employees. It allows employers to fill vacancies with qualified talent and lower their tax obligations in the process while also providing a much-appreciated work opportunity to someone in need. Therefore, employers should apply for WOTC and take the necessary steps to maximize participation.
However, claiming WOTC credits can be challenging. There are multiple steps involved with each eligible employee, including reviewing the answers on Form 8850, submitting forms in a timely manner and tracking employee hours and wages. Missing just one of these crucial steps can be disqualifying.
Streamlining the entire process allows employers to save time while screening for different federal and state tax credits simultaneously, enhance security and increase compliance. As a result, employers can apply for WOTC, ensure meeting the necessary deadlines, adhere to the necessary legislation, lower their tax rate, and both effectively and efficiently manage the entire process.
Outsource WOTC management to automate the screening process, turn the form into an efficient electronic process, ensure high-level security, reduce the administrative burden on hiring teams and increase compliance.
