Each year, employers claim over $1 billion in tax credits under the WOTC program, designed to assist individuals who consistently experience high rates of unemployment due to a variety of employment barriers. Finding a job can be a difficult process, but for veterans, people with disabilities, recipients of public assistance, or residents of economically depressed areas, the struggle has always been greater.
As a federal incentive program that encourages businesses to hire people from target groups, this income tax credit is beneficial for employers and employees who participate as well as for economic growth and productivity. Apart from this, WOTC offers additional benefits:
- It reduces employers’ federal income tax liability by as much as $9,600 per employee hired,
- There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit, and
- About 20% of new hires qualify for credit depending on the industry.
Work Opportunity Tax Credit Background
The WOTC program began on October 1, 1996, and has gone through several expirations and renewals by Congress. Throughout its history, the program has lapsed several times for periods of up to a year. However, it has been reinstated retroactively each time, allowing businesses and disadvantaged job applicants to continue to benefit from it.
The latest legislation extended WOTC tax credits retroactively from January 1, 2015, through the end of 2019. Apart from a 5-year extension, Protecting Americans from Tax Hikes (PATH) Act introduced a new targeted group – long-term unemployed individuals.
While the benefits of the work opportunity tax credit are obvious, it is difficult to predict what is going to happen when the WOTC extension expires. Therefore, with the program authorization nearing its end, employers need to understand how to integrate WOTC best practices to take advantage of this program and achieve maximum tax savings.
WOTC Impact on Employers
The WOTC program rewards companies for hiring from 10 targeted groups, mostly individuals who have been on public assistance in the recent past. To be eligible to receive a WOTC credit, employers have to pre-screen job applicants for eligibility on or before the day on which they give an offer of employment. After this, they have to submit an IRS Form 8850 to the appropriate State Workforce Agency for each eligible new hire within 28 days following their start date.
WOTC credit is calculated as a percentage of wages paid to certified employees who work at least 120 hours in the first year of employment. The percentage varies depending on how long employers retain the employee, and the amount of wages applied is determined by the category.
Employers can get a credit of 25 percent of first-year wages for certified employees who meet the 120-hour threshold. Also, they can get 40 percent of first-year wages for employees who work at least 400 hours during the first year of employment. For wages paid to certified long-term TANF recipients, employers can receive 40 percent of first-year wages and an additional credit equal to 50 percent of second-year wages paid to the certified employee.
Administering the Work Opportunity Tax Credit
WOTC has been around for over 20 years, but some companies avoid taking advantage of it because of certain misconceptions about the program that make business owners unwilling to go through the effort. The manual process of screening and seeking certification of eligible employees is considered to be labor-intensive and difficult to manage. In addition to this, dealing with the state agencies that are responsible for the program can be time-consuming, causing many employers to avoid WOTC.
Nowadays, however, there is a number of WOTC best practices that can help employers take the hassle and burden out of the screening and certification process. To begin with, they can streamline the entire WOTC process to virtually eliminate the need for paper or manual processing. Automation is the most important among WOTC best practices because of improved efficiency and accuracy of screening and applying for credit certification, increased compliance, and enhanced applicant experience.The WOTC program can be difficult to administer but the reward is worth it. Use this detailed guide to find the right approach, gain WOTC benefits without all the hassle.
WOTC Best Practices
Even though many companies do not bother with WOTC because of the time it takes to process and apply for credits, factors like increased profitability, cash flow, and compliance are too important to be overlooked. Following these WOTC best practices can help employers get the full value of the program:
- Encouraging participation by informing employees about WOTC benefits, such as reducing dependency on public assistance, development of new skills, and building confidence and stability;
- Creating a user-friendly WOTC screening process for job applicants by using electronic processes for collecting the data. Electronic solutions include the WOTC questionnaire in the hiring process. They also store and organize vital documents that can support and verify the authenticity of the WOTC credit, eligibility, and certification;
- Submitting screening documentation in a timely manner since timing is crucial to maximizing WOTC benefits. Integrating technology can help increase efficiency, while allowing companies to reduce the administrative burden associated with screening for and claiming WOTC;
- Assessing program outcomes and revising strategy to get a transparent view of the program’s performance. Without visibility on how an organization is handling WOTC capture, it is difficult to establish goals for future WOTC efforts.
WOTC’s Dual Value
Participating in WOTC can lead to numerous benefits for both an employer and future employees since it encourages business growth while assisting disadvantaged members of a community. Therefore, both sides win.
Even though there are complexities associated with WOTC administrative process, there are also ways to overcome them. Replacing manual processing with an automated solution ensures that employers complete the full WOTC process in a timely manner, efficiently, and in accordance with program requirements. Also, by keeping WOTC best practices in mind, companies can be better prepared to capture the credits for which they may be eligible, which can have a significant impact on their bottom line.