Since its beginning in 1996, the Work Opportunity Tax Credit (WOTC) has benefitted both employers and employees by encouraging businesses to hire individuals from certain target groups who have consistently faced significant barriers to employment.
The main objective of this federal tax credit incentive is to enable employees to gradually move from economic dependency into self-sufficiency as they earn a steady income and become contributing taxpayers.
By hiring individuals from target groups who meet specific criteria, an employer can receive from $2,400 to $9,600 in maximum credit per new hire, in the form of a dollar-for-dollar reduction in their tax liability.
In order to incentivize workplace diversity and facilitate access to good jobs for American workers, this program offers tax credits in an effort to overcome employment barriers faced by targeted groups of workers including:
- Unemployed Veterans
- Temporary Assistance for Needy Families (TANF) Recipients
- Food Stamp (SNAP) recipients
- Designated Community Residents
- Vocational Rehabilitation Referrals
- Supplemental Security Income Recipients
- Summer Youth Employees
- Qualified Long-Term Unemployment Recipient
Each group has its own eligibility requirements that the individual must meet in order for the employer to qualify for the credit.
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.
WOTC benefits are available only for new hires. Wages paid to an individual who was previously employed and is rehired do not qualify. In addition, wages paid to certain individuals who are related to the employer or business owner do not qualify.
How to Calculate the Credit
The number of credit employers can claim varies and depends upon which WOTC target groups are hired, the wages paid to those individuals in the first year of employment, and the number of hours the employees worked.
Full credit is calculated at 40 percent of first-year wages up to $6,000, for a maximum tax credit of up to $2,400. In this case, employees are required to work a minimum of 400 hours or more.
For a partial credit of 25 percent up to $1,500, a new employee is required to work at least 120 hours but less than 400 hours.Use this comprehensive guide to find out how to take advantage of WOTC benefits while increasing employment opportunities for member of target groups.
Reducing Federal Tax Liability
WOTC benefits can significantly reduce your corporate federal tax liability, and in some cases, WOTC can completely eliminate it. Employers need to have an income tax liability to be able to use the credit which cannot exceed the amount of income tax owed.
In case there is no tax liability, employers can still apply for the credit. Unused credits can be carried back one year and carried forward on future tax returns for up to 20 years. It is therefore likely that you will be able to use the credit in the future, once there is tax liability.
Reducing a company’s federal income tax liability reduces a company’s cost of doing business, and participation in the WOTC program may help fund other projects, or even assist in the expansion of your business.
Increasing Profitability and Cash-flow
Each WOTC-qualified employee can increase profitability by as much as 80%, as compared to a non-WOTC-qualified employee.
By taking advantage of the WOTC benefits, you can increase cash flow, therefore improving your margins and sustainability. With an increasingly high cost of doing business these days, WOTC can make your company more profitable.
No Limit on The Number of Individuals An Employer Can Hire
There is no restriction on the number of new hires who can qualify you for the tax savings. Whether your business hires 10 or 10,000 eligible employees, your tax credits will continue to pile up and improve your profit margin.
20% of New Hires Are Potentially Eligible
One of WOTC’s benefits is that even if you have never applied for this federal initiative before, it is highly likely you have hired or will hire employees who meet the qualification criteria. Typically, about 20% of new hires qualify for credit depending on the industry. Some industries may experience an even higher rate of qualification.
According to the U.S. Department of Labor, there were 5.6 million new hires in April 2018. With an average of 20% of those workers eligible for WOTC tax credits, that’s more than $2.4 billion in tax credits that potentially could have been claimed.
How to Maximize Participation in WOTC
Getting the most from WOTC benefits involves managing many challenges like meeting deadlines established by law, submitting forms to state agencies, monitoring hours and wages, providing supporting documentation, and calculating tax credits. Due to the complex administrative processes, significant resources are required to implement the program correctly. Nevertheless, there is an easy way to avoid all the hassle with WOTC and stop missing out on tax credit opportunities.
With the right partner, you can outsource the WOTC administration and automate the entire process to end up with maximized credit yield without adding staff or increasing administrative expenses. An online screening platform takes new hires through the questionnaire electronically and logically, enabling the immediate submission of forms with e-signature. On the other hand, manually completed forms are frequently filled out incorrectly, are missing information, or do not reach the State in time to meet the submission deadline, leaving you with missed credit opportunities.
An electronic WOTC questionnaire can become a seamless part of your hiring process, allowing you to avoid all administrative hassles of the program. Complete automation of the complex and time-consuming screening and reporting steps results in a higher certification rate and increased compliance and you pay only once actual credits are secured on your company’s behalf.
Improve Your Bottom Line with Tax Savings
The WOTC program has been a win-win situation for both employers and employees. Employees previously considered lacking skills and abilities or having a disability to employment simply were not hired because they were considered too much of a risk. With WOTC they get an opportunity to gain employment in what otherwise would be a losing situation. With high unemployment rates across the nation, the WOTC program continues to assist employers to boost their bottom line with millions of dollars in federal income tax savings.
In the past, WOTC may have seemed cumbersome, paper-intensive, and time-consuming to many employers. Nowadays, however, electronic solutions make this process simple and smooth, allowing you to leverage WOTC benefits to your business and save a lot of money.
Being a program that is very well received, WOTC is much better now than it used to be because it has been expanded with new categories and extended for 5 years. It allows employers to free up money, invest it in other areas of the company, and increase profitability and cash flow.