The Work Opportunity Tax Credit program is a federal incentive for employers to hire from certain groups of people who may need assistance finding jobs. It was created in 1996 by the Small Business Job Protection Act and has been extended many times by Congress. As part of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, included in the Consolidated Appropriations Act, 2021, the Work Opportunity Tax Credit program received a five-year extension through December 31, 2025.
Furthermore, the Internal Revenue Service (IRS) recently announced it is providing transition relief to certain employers claiming WOTC. Notice 2021-43 extends the 28-day deadline for employers to submit a request to a designated local agency (DLA) to certify that an employee hired between January 1 and October 8 of this year is a Designated Community Resident or a Qualified Summer Youth Employee.
Given the different benefits of the Work Opportunity Tax Credit program and the extension through 2025, establishing a WOTC process can provide significant savings to employers who hire eligible employees.
Work Opportunity Tax Credit Program Overview
The Work Opportunity Tax Credit program is designed to incentivize businesses to hire individuals who have faced challenges that made it difficult to enter the workforce. Eligible employers can claim the credit if they hire individuals from specific target groups, as defined by the IRS.
The value of the tax credit is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned in the period of employment applicable to that target group. The maximum credit per new hire can range from $2,400 to $9,600.
The following target groups are eligible for the Work Opportunity Tax Credit program:
- Qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program,
- Qualified veterans,
- Qualified ex-felons,
- Designated community residents,
- Vocational rehabilitation referrals,
- Qualified summer youth employees,
- Qualified members of families in the Supplemental Nutritional Assistance Program (SNAP),
- Qualified Supplemental Security Income recipients,
- Long-term family assistance recipients, and
- Long-term unemployed individuals – unemployed for more than 27 weeks.
To take part in the Work Opportunity Tax Credit program, employers need to complete one of the following steps:
- Obtain a certification from a designated local agency on or before the day the individual starts work in order to confirm that they are a member of a targeted group; or
- Complete Form 8850 on or before the day the individual is offered employment and submit the form to the appropriate designated local agency within 28 days after the individual starts work.
Five-Year Extension of the Work Opportunity Tax Credit Program
Prior to Congress passing the Consolidated Appropriations Act of 2021, the WOTC program was set to expire on December 31, 2020. Apart from the Work Opportunity Tax Credit program, two more federal tax credits that were set to expire on December 31, 2020, were extended with this Act. This latest extension means that businesses can continue to benefit from workers who have experienced long periods of unemployment and members of other target groups.
The Work Opportunity Tax Credit program is widely accepted because of the incentive for employers to hire people that are largely dependant on government support and assistance. Therefore, a bipartisan group of Senate lawmakers introduced the Work Opportunity Tax Credit & Jobs Act (S.269) to make WOTC permanent.
Extension of Certification Deadline
According to Notice 2021-43, certain employers have until November 8, 2021, to submit required certification requests. To be certified as a Designated Community Resident or a Qualified Summer Youth Employee under the WOTC, an employee must have a principal place of residence within an Empowerment Zone where the employee continuously resides.
The notice also provides guidance to certain employers who submitted a Form 8850 to a DLA for these employees during the period of transition relief and received a denial due to the termination of Empowerment Zone designations on December 31, 2020, or who received certification before Empowerment Zone designations were extended.
WOTC Savings for Employers
Since its enaction, the Work Opportunity Tax Credit program has been revised and reauthorized numerous times. However, its history of near-expiration and extension should not keep employers from taking advantage of this tax incentive.
Over the years, the Work Opportunity Tax Credit program has helped employers reduce hiring and labor costs and helped millions of individuals who would otherwise be dependent upon government aid programs secure and maintain stable employment. Furthermore, many organizations had to reduce the number of their employees due to the impacts of the COVID-19 pandemic. Now, as they begin to reopen, programs like the WOTC can help recompensate the federal income taxes imposed on those businesses.
Participating in the Work Opportunity Tax Credit program may seem overwhelming for employers. Along with completing various forms and obtaining certification from the state, they need to track employees’ work hours and qualified wages plus maintain accurate WOTC records. However, employers can simplify WOTC processing with proper software solutions. This allows them not only to automate the screening process, but also ensures enhanced security, reduces the administrative burden on hiring teams, and increases compliance.