As a federal tax credit available to all private sector businesses, the Work Opportunity Tax Credit (WOTC) is designed to incentivize employers to hire members of certain target groups who have had barriers to gaining employment. As such, this program helps employers reduce hiring and labor costs but also provides opportunities for millions of individuals who otherwise may have difficulty securing and maintaining stable employment.
Due to the impact of COVID-19, many organizations had to significantly cut their operating costs. Whether they reopen, grow, or continue business operations in the current economy, taking advantage of WOTC tax credits can make balancing their budget easier and help offset the inflationary pressure in the current business environment.
However, capturing WOTC without disrupting business operations often depends on how companies handle it. Therefore, to achieve the cost-effectiveness of this program and claim millions of dollars in available tax credits, employers should take appropriate measures to improve WOTC management.
Overview of the WOTC Program
Understanding the program’s basics is the first step leading to successful WOTC management. The WOTC program encompasses a long history, from its creation by the Small Business Job Protection Act in 1996 to the latest five-year extension under the Taxpayer Certainty and Disaster Tax Relief Act of 2020.
WOTC’s value is determined by the target group the employee qualifies under, the number of hours worked, and the wages earned in the period of employment. An important part of WOTC management is meeting the deadlines as employers need to apply for the tax credit within 28 days of an eligible new hire’s start date. Depending on which target group the individual belongs to, the maximum credit per new hire can range from $2,400 to $9,600.
To qualify for the WOTC tax credit, employers need to obtain confirmation of job applicants’ WOTC eligibility status before making an employment offer. Eligible individuals are asked to self-identify using the Work Opportunity Tax Credit Form 8850. This form broadly inquires whether the job applicant qualifies for the WOTC and certifies an individual as a member of a target group.
There is no limit to the number of new hires who can qualify for WOTC, but individuals need to be identified as members of one of ten target groups:
- Unemployed veterans, including disabled veterans,
- Temporary Assistance for Needy Families (TANF) recipients,
- Food stamp (SNAP) recipients,
- Designated community residents living in Empowerment Zones or Rural Renewal Communities,
- Vocational rehabilitation referred individuals,
- Supplemental security income recipients,
- Summer youth employees living in Empowerment Zones, and
- Qualified long-term unemployment recipients.
Enhancing WOTC Screening Process
WOTC screening is necessary to determine which potential hires qualify to be included in the calculations for the employer’s tax credit. The employer and applicants complete Form 8850 as a pre-screening form for the state workforce agency and Form 9061 for federal tax credit eligibility purposes. Once the state agency confirms that an employee is qualified, the employer may apply to the IRS for the tax credits for all employees.
However, some of the common challenges that employers need to deal with during WOTC management are the labor-intensive workflows of manual paper applications and meeting the 28-day deadline. On the other hand, employees can opt out of completing the WOTC screening questions if they find the WOTC questionnaire too complicated or they choose not to disclose the necessary data. As a result, employers miss an opportunity to gather the information necessary to qualify for a tax credit.
To overcome these challenges and enhance WOTC management, employers can use an automated system compatible with the WOTC process. Thus, they can apply a simple and error-free procedure consistently for every new hire, remove the time-consuming burden of identifying and processing credits, and reduce the demands on their staff while ensuring they receive maximum savings. Furthermore, an automated screening solution uses plain language, skips past irrelevant sections, and works across multiple media platforms to help ensure a high rate of screening compliance. As a result, employers not only simplify the WOTC management but also make it easier for applicants to finish their applications, thus improving the WOTC questionnaire completion rate.
Maximizing WOTC Participation to Increase Savings
Any business, regardless of size or industry, may be eligible to claim tax credits under the WOTC program and increase its savings. In addition to this, WOTC participation allows employers to help workers with barriers to employment gain access to jobs, ease their transition from one job to another, and create high-performance workplaces.
Even though employers may encounter difficulties during WOTC management, its benefits are worth every effort. Furthermore, the Consolidated Appropriations Act of 2021 extended WOTC through December 31, 2025, creating more opportunities for significant savings to those employers who hire eligible employees. Employers who combine this with the right software solution can turn WOTC management to their advantage and significantly enhance tax credit savings while eliminating any burden or effort to their field HR and Operations team and maintaining compliance with the necessary requirements.