With the help of the Work Opportunity Tax Credit (WOTC), companies can potentially benefit when hiring individuals who are members of certain defined populations. This federal tax credit can not only help employers reduce federal income tax liability but also serve as an incentive for them to hire, train, and retain job seekers who can otherwise have challenges finding employment for various reasons. However, many employers fail to conduct WOTC screening and identify WOTC candidates as this is oftentimes a complicated and time-consuming procedure for each party involved. To achieve the cost-effectiveness of this program and claim millions of dollars in available tax credits, employers should take appropriate measures to optimize WOTC management and capture additional tax credits without disrupting business operations.
What is WOTC?
From its creation by the Small Business Job Protection Act in 1996 to the latest five-year extension under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, WOTC aims to effectively subsidize the cost of hiring and employing members of WOTC target groups. As such, it helps both employers who are facing labor shortages and certain groups of people who need assistance in finding jobs.
In general, employers who hire members of target groups qualify for the WOTC program, but to optimize WOTC management, they need to be aware of some rules and restrictions, including the following provisions:
- There is no limit to the number of new hires an employer may claim for the WOTC;
- The tax credit is equal to 25 percent of the qualified employee’s first year of wages if the employee works between 120 and 400 hours in that year. It grows to 40 percent if the employee works more than 400 hours in that year;
- No credit is available unless the worker completes at least 120 hours of work. The credit is reduced if the individual works at least 120 hours but less than 400 hours;
- For-profit employers of any size may apply for the WOTC;
- 501(c)(3) nonprofit employers may apply for the WOTC program for the veteran target groups only;
- The Work Opportunity Tax Credit applies to ten target groups;
- The credit is available only for new hires. Wages paid to an individual who was previously employed and is rehired do not qualify;
- Relatives and dependents of majority business owners do not qualify as WOTC hires;
- Self-employed individuals do not qualify as WOTC hires;
- Any type of job is acceptable, including temporary, seasonal, part-time, or full-time work.
What is WOTC Screening?
Before employers can claim a Work Opportunity Tax Credit, they must first receive certification from a State Workforce Agency (SWA) that the new hire meets the qualifications of one of the target groups. This is done using IRS Form 8850 and one of two forms from the Department of Labor, ETA Form 9061 or ETA Form 9062. Either form accompanies Form 8850 submissions.
Both employers and applicants must complete IRS Form 8850. When the job offer is made, the applicant completes the first page showing their eligibility. When the applicant is hired, the employer completes the second page giving their information as well as information on the person hired.
ETA Form 9061, or the Individual Characteristics Form, provides specific information about how an applicant answered the WOTC questionnaire. ETA Form 9062, is the Conditional Certification Form for applicants who have been pre-screened for WOTC by an SWA.
As soon as the person is hired, employers submit Form 8850 and Form 9061 to the state workforce or employment agency for a determination of the eligibility of the applicant for WOTC credit. The forms must be submitted no later than 28 calendar days after the person begins work. Once the state agency certifies the worker’s eligibility status, it sends a determination letter to the employer.
Overcoming WOTC Screening Challenges
Typically, the more WOTC tax credit screenings a company completes, the higher the likelihood of receiving tax credits. However, WOTC screening is voluntary, which can often result in companies not achieving their full potential in credits. It is in an employer’s best interest to optimize WOTC management and present the screening form early, thus ensuring that applicants complete it.
Some of the common challenges that employers encounter in this process are the labor-intensive workflows of manual paper applications and meeting the 28-day deadline. In addition to this, employees can choose not to complete the WOTC screening questions if they fail to understand the WOTC questionnaire or decide not to disclose the necessary data. Consequently, employers may miss an opportunity to gather the information necessary to qualify.
To overcome these challenges and optimize WOTC management, employers can use an automated system compatible with the WOTC process. This simplifies data collection with questions tailored to help applicants navigate them smoothly, making it easier for them to finish their applications, thus improving the WOTC questionnaire completion rate. In addition, an automated screening solution stores data in a centralized location by allowing employees to complete the documentation online as part of the onboarding process and makes signing the necessary documents easier with electronic signatures.
Optimize WOTC Management to Increase Savings
Over the years, WOTC has evolved into a successful tool for encouraging job creation and retention. This tax credit incentive helps members of target groups earn a steady income and make their way to becoming financially self-sufficient and contributing taxpayers. On the other hand, employers get an opportunity to help people find much-needed employment while diversifying the workforce with qualified employees who increase tax savings for their businesses. Furthermore, WOTC-eligible individuals may be more likely to appreciate the job opportunity and become productive long-term employees, which also benefits companies.
Even if employers encounter difficulties during WOTC administration, they can take measures to optimize WOTC management, evaluate tax credit eligibility and track each qualified applicant through WOTC screening, certification, and credit calculation to achieve maximum tax credit benefits. As a result, they can turn WOTC management to their advantage and significantly enhance tax credit savings while staying compliant with changing tax credit laws, eliminating errors, avoiding penalties, and meeting the necessary deadlines.
