Employee compensation is expected to increase nearly 4% in 2022, resulting in the fastest wage growth for the American worker in over a decade. This increase is partly due to the Great Resignation, which has seen historically high turnover rates in U.S. workplaces, accompanied by an increasingly competitive labor market. Moreover, half of U.S. states are planning minimum wage increases for 2022, with California considering a phased minimum wage increase that would reach $18 per hour by 2025. How can you and your HR team keep up with these rising costs? One way is to attract and retain employees who qualify for the Work Opportunity Tax Credit (WOTC).
What Is the WOTC?
The WOTC is a tax credit for employers who hire candidates from targeted groups that have traditionally experienced barriers to finding work.
The credit is significant, generally calculated at 40% of wages paid to qualified new hires. Maximum credits generally range from $2,400 to $9,600 per qualified employee, depending on the targeted group. The program has recently been extended through December 31, 2025, and a bipartisan group of senators has introduced legislation that would make the program permanent.
The benefits of participating are obvious, but the difficulty is identifying candidates who qualify for the program and submitting the required documentation necessary to claim the credit. The Great Resignation has led to a war for talent, and under wartime conditions, recruiters may feel that they cannot afford to add a filter that slows down their search process. To get the job done efficiently, HR departments may consider hiring a third-party vendor to help administer their identification and submission of WOTC-eligible hires.
How Many Candidates Qualify? More Than You May Think
A complex set of criteria determines whether candidates are eligible for the WOTC, consisting broadly of the following:
- People in families that are or have been in the Temporary Assistance for Needy Families (TANF) program
- People in families receiving food stamps (i.e., SNAP benefits)
- Anyone receiving Supplemental Security Income (SSI)
- Youth hired to work during the summer from an Empowerment Zone or an enterprise or renewal community
- Long-term unemployed individuals who have received unemployment compensation
- Veterans who are unemployed, disabled, or receiving food stamps
The COVID-19 pandemic has only increased the pool of candidates who belong to at least one of these groups. For example, as of September 2021, the number of SNAP recipients had risen 18% since the beginning of the pandemic. Housing and employment hardships also remain widespread.
Disabled veterans qualify for the largest credit amounts under the WOTC. More than 5 million veterans are currently receiving disability compensation from the United States Department of Veteran Affairs, with nearly 260,000 newly qualified veterans added to the rolls in 2020.
Furthermore, the higher turnover rates accompanying the Great Resignation mean that a greater percentage of total employees are likely to be new hires. Therefore, a more significant percentage of total payroll dollars at any given company may be eligible for WOTC offsets.
Breaking it Down by the Numbers
Imagine a company with 100 new hires annually, and for simplicity’s sake, imagine that all those employees start at $50,000 per year. That would constitute a $5,000,000 payroll for new hires. If that payroll were to increase by the projected 4% in 2022, it would increase by $200,000 over the course of the year.
Now imagine that this company begins applying for the WOTC, and it finds that 15% of its 2022 hires are eligible for a credit of $2,400-$9,600. That company would receive a total tax credit of $36,000-$144,000, offsetting between 18% and 72% of the $200,000 payroll increase.
Any U.S. employer may apply for the WOTC, but some struggle to implement hiring processes that efficiently identify eligible candidates. Others may have difficulty completing necessary WOTC application forms in time. The WOTC is a federal program administered by the states, meaning that different states have different agencies in charge of the program or the records relevant to assessing candidate eligibility.
A third-party vendor can help streamline the process. To encourage candidates to provide complete WOTC eligibility information, a qualified vendor should provide eligibility assessment surveys that are as short and succinct for candidates to complete as possible. They should also work with HR departments so that the vendor can pull needed employee information themselves without adding extra tasks to queues of busy HR professionals. Finally, vendors should maintain relationships with all relevant state agencies so they can quickly access necessary government records and submit all required forms.
As companies prepare for the largest wage increase in 14 years, the time to act is now. With a larger pool of qualified candidates than ever before, and with an extension now lasting through at least 2025, the WOTC is the clear solution for companies looking to offset their costs and respond intelligently to the conditions created by the Great Resignation. To maximize program benefits and minimize implementation headaches, consider choosing a qualified, experienced vendor to help identify eligible candidates and submit successful applications.