Employers can receive a tax credit every time they hire an eligible new employee thanks to the Work Opportunity Tax Credit (WOTC). As a federally funded tax credit program, WOTC is designed to provide an incentive for businesses to hire individuals with documented barriers to employment. Approximately $1 billion in tax credits are claimed each year under WOTC, proving how valuable this program is for both employers and employees across the U.S.
Even though the Work Opportunity Tax Credit was scheduled to expire at the end of 2019, it will remain active through 2020. On Dec. 20, 2019, U.S. President Donald Trump signed H.R. 1865, Further Consolidated Appropriations Act, 2020, providing for numerous extensions of tax incentives, including a one-year extension for WOTC.
The Latest Extension of the Work Opportunity Tax Credit
H.R. 1865 resulted in numerous extensions of tax incentives, provisions relating to tax relief due to natural disasters, and other changes to the federal tax code. The Act includes a one-year extension through 2020 to the Work Opportunity Tax Credit (WOTC), Indian Employment Credit (IEC), and Empowerment Zones (EZs) and it applies to individuals who begin work after December 31, 2019. Apart from extending these tax credit programs, the spending package includes a $2.5M increase in WOTC funding for FY 2020. Such an increase was provided in order to help with the administration of the Work Opportunity Tax Credit, reduce the backlog at the state level, and ensure technical assistance and staff training. The funding will also provide the resources necessary to modernize the administration of the program in some states.
Disaster relief for Hurricanes Florence and Michael and the 2018 California Wildfires are also included within H.R. 1865, providing tax relief to victims and businesses located in federally designated disaster zones. Such businesses may receive up to $2,400 in tax credits per retained employee.
The tax incentive extended by the legislation and of particular interest to many businesses is the Work Opportunity Tax Credit. Created in 1996, the WOTC program has been modified and extended many times since. Its last five-year extension was under the Protecting Americans from Tax Hikes Act (PATH). This Act extended WOTC through December 31, 2019, reauthorized the empowerment zones until Dec. 31, 2016, and added qualified long-term unemployment recipients as a WOTC target group.
During twenty-four years the WOTC program has served as an effective way of providing steady income and self-sufficiency to targeted individuals as well as benefits to employers who hire them. This is why businesses need to take advantage of the latest one-year extension of the Work Opportunity Tax Credit and earn a tax credit of up to $9600 for each WOTC qualified employee they hire.Use this detailed guide to find out how to take advantage of the WOTC program and increase your return on investment while helping employees from target groups.
Work Opportunity Tax Credit Basics
The Work Opportunity Tax Credit allows for-profit employers of any size to reduce their federal tax liability by hiring people who have consistently experienced significant barriers to employment. As such, it helps both employers who are facing labor shortages and certain groups of people who need assistance in finding jobs. However, there are 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.
Can the WOTC Program Become Permanent
While there are numerous advantages of the Work Opportunity Tax Credit, the fact that it is a temporary tax break is one of its greatest downsides. In other words, the WOTC program is among the tax laws that periodically expire and need to be extended by Congress. The latest extension gives employers one more year of tax incentives to hire eligible workers. However, making WOTC permanent would make it a much more effective tool for reducing large costs associated with hiring new employees, while enabling members of target groups to achieve gainful employment.
U.S Senators Sherrod Brown, Rob Portman, Ben Cardin, Roy Blunt, Bill Cassidy, and Bob Mendez introduced the Work Opportunity Tax Credit & Jobs Act in the Senate in April 2019, with the aim of making the WOTC program a permanent addition to the tax code. According to Bill Cassidy, pro-job policies lead to record low unemployment and making the Work Opportunity Tax Credit permanent is good for American businesses and those still struggling to find work. WOTC has already become one of the best tools to promote the employment of individuals who belong to target groups. For it to be even more effective, WOTC should become a permanent addition to the tax code.
Whether or not this recommendation passes, the Work Opportunity Tax Credit is available through 2020, allowing businesses to capture thousands in credits. Searching for and screening job candidates who qualify for the WOTC, as well as applying for and claiming the credit, does take some diligence and time. However, automating the WOTC program allows employers to identify and certify more eligible applicants by simplifying the process, reducing errors, and streamlining the forms necessary for certification. As a result, employers can not only cut their business expenses, but they can also make a significant difference in someone’s life.