WOTC: Tax Credit Overview and Tips

Published: July 26, 2023 by Tim Cate

WOTC Form 8850 can help target groups including veterans with hiring

During the Pandemic, the labor participation rate dropped significantly, as many potential participants in the job market opted not to work for a variety of reasons. In the first half of 2023, the labor participation rate has been inching upward. Despite this increase in the number of workers participating in the labor market, job opening levels remain very high and employers are still struggling to fill their open positions. This creates a unique opportunity for companies participating in the Work Opportunity Tax Credit (WOTC) program. WOTC is a federal tax credit program encouraging businesses to hire people from certain disadvantaged groups by offering an income tax credit to businesses who employ individuals who meet the criteria.

Given the challenges businesses have sourcing talent and filling their open positions, they are often looking for help finding qualified candidates. Not only can WOTC help provide qualified, motivated potential employees, the financial returns available from WOTC can help offset marketing efforts to attract potential candidates.

Further, because labor participation rates are now increasing after a post-pandemic decline, many potential employees may have realized more hardships over the past year, increasing the likelihood of larger numbers of potential hires meeting WOTC eligibility criteria. In fact, according to the US Department of Agriculture, the March 2023 Supplemental Nutrition Assistance Program, otherwise know as Food Stamps, had an increase in the number of households participating in the program by 2.8% as compared to March of 2022.

Work Opportunity Tax Credit Overview

The WOTC has existed as a tax credit program since 1996. It had undergone several expirations and renewals by Congress over the years, including several lapses for periods up to one year, but was reinstated retroactively each of these times. This allowed for continued participation in this beneficial program for both businesses and qualified job applicants.

The latest legislation extended WOTC tax credits in 2021, through the end of 2025. It is encouraging to note that, having recognized the importance of the WOTC program, a bipartisan group of lawmakers in the Senate introduced the Work Opportunity Tax Credit & Jobs Act (S.269) with the aim to make it permanent.

Even before that happens, employers should be aware of the ways to incorporate WOTC best practices to make the best use of the program with the maximum tax savings.

WOTC: Tax Credit Effects on Employers

The WOTC program provides tax relief to companies for hiring individuals belonging to one of the 10 target groups, including those with long-term unemployment records. In order to make use of the WOTC credit, employers are obliged to screen job applicants and determine their eligibility on or before the day on which they give an offer of employment. Having secured this screening for eligibility for a potentially eligible candidate, they are required to submit IRS Form 8850 together with ETA Form 9061 or ETA Form 9062, for each newly hired eligible employee, within 28 days after their starting date.

The WOTC credit is calculated in relation to wages paid to the employees certified for the program, provided that they work at least 120 hours in the first year of employment. The percentage then varies depending on how long employers retain the employee, and the amount of wages applied depends on the target group of the employee.

If employees meet this 120-hour threshold, employers can get a credit of 25 percent of their first-year wages. If the 400-hours threshold is met, the credit can amount to 40 percent of the first-year wages.

Implementing the Work Opportunity Tax Credit

WOTC is not a new tax credit program. It has been in place for over 25 years and has gained broad acceptance among businesses looking to reduce operating costs. However, there is still a certain reluctance by some companies to participate. This comes from common misconceptions they hold about the program in relation to the process of screening their candidates before the job offer, and the belief that the process is inordinately long and burdensome.

This should not be the reason to give up the Work Opportunity Tax Credit program and ignore a lucrative opportunity. By incorporating WOTC best practices, it is possible for employers to streamline WOTC screening and certification, eliminating manual processing of documents and administration for the hiring team. By automating the process, WOTC best practices can be better implemented, improving efficiency and accuracy. This way, compliance is secured and applicant experience becomes hassle-free.

Implementing the WOTC program takes some effort, but its benefits far outweigh any implementation challenges.

Best Practices

Despite the administrative efforts required to capture the WOTC opportunity, which cause some companies to disregard the program, there are some important factors that should be considered, such as availability of cash flow and increase in profitability the program offers, and the relative ease of capturing the benefit relative to the effort required. Every year over $1 billion in tax credits is claimed through this program by employers. The following WOTC best practices can help companies realize the full potential of the program.

  1. Incorporate a WOTC process that integrates with the job application workflow and that is very easy for candidates to navigate and complete.
  2. Ensure the integrated process captures all required forms and signatures electronically so no one on the hiring team needs to be involved with ensuring the process is complete.
  3. Review analytics and evaluate the results of the program and revise the strategy for a full assessment of the performance. The analysis helps establish the scope of the future goals and expectations of the WOTC program.

Not only will these best-practices ensure you are able to capture this incentive, benefitting your company, the candidates who qualify and the economy as a whole, they also ensure it does not impact the efficiency of your hiring process.

WOTC as a Win-Win

WOTC participation has clear and numerous benefits for all parties – employers, employees, and the economy as a whole. It helps businesses grow while assisting disadvantaged groups.

Although the WOTC administrative process is complex, effective streamlining is possible. Incorporating WOTC best practices allows companies to capture tax credits available through participation in the program and enhance their operations through tax savings. Additionally, implementing an automated solution will ensure you complete the full WOTC process in a timely manner and in line with the requirements of the program, and keep your field HR and Operations team focused on their primary objectives.

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