February 24, 2021 – At the end of 2020, the Work Opportunity Tax Credit (WOTC) program was extended for an unprecedented five years. Having this extension is very beneficial, because it allows finance and human resources (HR) leaders to analyze their business’ WOTC strategy and process, and ultimately make changes to increase efficiencies. Whether your company is a for-profit or nonprofit organization, you can potentially benefit from this tax credit when hiring new employees. However, businesses must capture the right information before the job offer is made (technically, on or before the day an offer is extended) So, it is critical that the process be compliant with this requirement, but also provide an efficient means to identify those employees who meet the eligibility criteria.
Know Who Qualifies for the WOTC Program
Even during periods of low unemployment, some segments of the population find it more difficult to find a job, or are transitioning between jobs, which often leads to a reliance on government assistance programs. By rewarding companies to hire people who historically have higher rates of unemployment, the government hopes to lower its spending on public assistance, help workers become self-sufficient, add to the diversity of the workplace and fulfill its goal of providing great jobs to all Americans.
The reward takes the form of a tax credit the employer is entitled to for every individual hired from “targeted groups” as defined by this program. And with insured unemployment claims nearing 5 million per week, you should never assume that a potential hire is ineligible.
Here’s a summary of who is included — although the qualifying categories do change from time-to-time:
- A member of a family on the Temporary Assistance for Needy Families (IV-A) program for any nine-month period during the last 18 months
- A member of a family that was on the IV-A program for 18 months but whose participation ended less than two years ago
- A member of a family whose participation in the IV-A program ended less than two years ago, because they received the maximum IV-A benefits allowed
- An individual or member of a family between the ages of 18 and 39 who received Supplemental Nutrition Assistance Program (SNAP) benefits, also known as food stamps, for the previous six months or for at least three of the previous five months
- Someone convicted of a felony or released from prison for a felony in the past year
- Anyone receiving Supplemental Security Income (SSI) within 60 days of being hired
- Youth between ages 15 and 17 who are hired to work between May and September and who live in an Empowerment Zone, enterprise community or renewal community
- Someone who has been unemployed for at least 27 consecutive weeks and who received unemployment during all or part of that period
- A veteran who:
- is in a family that received SNAP benefits for at least three months during the last 15 months
- has been unemployed for at least four weeks but less than six months during the past year
- has been unemployed for at least six months during the past year
- was discharged or released from duty in the past year and is disabled and entitled to compensation for a service-connected disability
Three Major Steps in the WOTC Process
- Data Collection
The IRS requires that job applicants/candidates provide information to complete Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. Most organizations add these questions to the job application workflow.As long as you collect the right data, you can format the questionnaire to match your existing applicant workflow. Because the questions on the IRS form 8850 can be difficult to understand, some organizations create their own questionnaire and use programming logic to derive answers that correspond to the IRS form. For example, instead of “Check here if you are a veteran and you were unemployed for a period or periods totaling at least 6 months during the past year,” an organization might ask “Are you a veteran?” in one question and “Were you unemployed for at least six months during the past year?” in another question. Programming logic behind the scenes combines the responses to create an answer that corresponds to the IRS form.
For each new hire you believe is qualified for the WOTC, you must provide Form 8850 and DOL ETA Form 9062 to the DOL state agency. The agency will look up the employee in its databases and issue a certification if the agency can verify that the new hire meets the qualification criteria.
The available tax credit is calculated as a percentage of a certified employee’s wages, so long as the employee works a minimum amount of time or number of hours. Corporations are required to submit quarterly tax estimated payments, and they can reduce those quarterly payments by the amount of WOTC accrued up to that point. Nonprofits, qualifying for the veteran categories, can use the credit to offset the amount of social security tax they owe on wages paid to all employees.
Outsourcing WOTC Simplifies the Process
Many WOTC service providers offer integration capabilities with Recruiting or HR Management (HRM) Systems. By outsourcing your tax credit function, you may be able to leverage these pre-existing integrations and simply “turn on” the integration functionality in your existing platforms. Your tax credit partner typically takes care of the rest of the process, including screening, submitting forms to state agencies, obtaining certifications and credit tracking.
Many (HR) and finance executives are often surprised by the number of new hires who fall into one of the eligibility categories. Even during a strong job market and economy, many people may claim unemployment benefits or receive public assistance while in job transition, when leaving a job to care for a loved one, and so on. When there is a down-tick in the economy, causing layoffs or a recession, people who are normally self-sufficient may rely on financial support from the government in order to survive. The WOTC program is an effective way for companies to offset hiring and onboarding costs and becomes especially valuable during an economic downturn, ahead of increased hiring and recovery. So, when the economy recovers and you start hiring again, make sure you’re set up to get credit for hiring workers from these disadvantaged groups. WOTC is a win-win for everyone involved.