(by Andres Rojas)
What Is the Work Opportunity Tax Credit?
The Work Opportunity Tax Credit is a federal tax credit given to businesses that hire individuals from members of certain targeted groups.
When scouting for talent, a business’s focus is on finding candidates that meet their criteria. Companies already have many employment problems of their own, so they’re unlikely to care about their candidates’ problems.
Unfortunately, this shortsightedness means that members from certain vulnerable groups – who can’t compete on a level field – are often overlooked. The WOTC was created in 1996 to address precisely this issue.
By offering a monetary incentive, the Work Opportunity Tax Credit encourages employers to recruit individuals from groups who traditionally face significant barriers to employment. Although the WOTC was scheduled to expire by December 2020, the passing of the Consolidated Appropriations Act, 2021 extended this and many other credits until 2025.
What Are the WOTC Targeted Groups?
The Work Opportunity Tax Credit is a federal incentive that employers can claim if they show proof of hiring employees from eligible targeted groups.
According to the IRS, targeted groups include:
- Temporary Assistance for Needy Families (TANF) benefits recipients.
- Physically or mentally disabled individuals who have completed rehabilitative services.
- Qualified veterans.
- Qualified ex-felons.
- Supplemental nutrition assistance program (SNAP) recipients.
- Designated Community Residents (DCR).
- Summer youth employees living in an empowerment zone.
- Individuals receiving Supplemental Security Income (SSI) benefits.
- Long-term family assistance recipients
- Qualified long-term unemployment recipients.
There is one caveat about WOTC eligible individuals. Namely, that only new hires allow employers to qualify for this tax credit. This means that current or retired employees aren’t covered under this tax credit’s provisions.
For more information about eligibility, please check the IRS page.
How Does the WOTC Benefit Employers?
Besides increasing the diversity of your workforce and giving more job opportunities to marginalized segments of the population, this federal tax credit also helps employers save a sizable amount of money every year. Depending on the employee’s length of employment, employers can end up making back anywhere from $1,200 to $9,600 per eligible employee.
Despite these pros, studies show that this tax credit has little influence on the hiring practices of most employers. However, its effects are mostly seen in big companies that have a high employee turnover.
Big companies who are part of low-wage, high-turnover industries can make big windfall gains by hiring disadvantaged workers over non-WOTC eligible candidates. Indeed, this is one of the reasons why policymakers have criticized the tax since its creation.
Since companies in these industries would have hired these workers even without a tax incentive, the WOTC allows them to basically get paid for hiring new talent.
How Does an Employer Claim the WOTC?
Although employers who inquire into their candidates’ health would normally get in trouble, the U.S. Equal Employment Opportunity Commission (EEOC) has stated that asking candidates to self-identify their conditions doesn’t violate existing anti-discrimination laws.
Companies that want to claim this tax benefit can pre-screen candidates using questionnaires, although most employers prefer hiring intermediaries, and then submitting Form 8850 to the State Workforce Agency (SWA).
The WOTC is a dollar-for-dollar tax credit that takes into account the number of hours an eligible employee has worked for an employer. Employers can claim a maximum credit equivalent of 40% of the first $6,000 in wages paid to an eligible employee in his first year of employment or $2,400.
The amount claimed is hour-based. So while employers can claim this number for workers who stayed on the payroll for at least 400 hours, they can only claim 25% or $1,500 if the employee worked between 120 hours and less than 400 hours.
Furthermore, the Protecting Americans from Tax Hikes (PATH) Act of 2015 allows employees to retroactively claim the tax credit for any eligible employee hired between December 31, 2014 and January 1, 2021.
The Bottom Line
While the WOTC can significantly reduce a business’s tax liability, the application is confusing and time-consuming – employers must get certification that an employee is eligible before they can claim the credit. That’s why many companies don’t take advantage of it and end up leaving money on the table.
However, the fact is that the WOTC is one of the most useful tax credits available for businesses of all sizes. So if you don’t know how to handle the paperwork or what employee is eligible, make sure you contact a certified tax credit professional who can give you a hand.