What if you could help your small business clients save money on their taxes and better compete for workers in a very tight labor market? The Work Opportunity Tax Credit can do just that.
The Work Opportunity Tax Credit (WOTC) was first created as part of the Small Business Job Protection Act of 1996 and has been extended on a regular basis. In 2021, Congress authorized an extension of WOTC until Dec. 31, 2025.
Here are five things your clients need to know about WOTC to realize the full value and impact of this important tax credit
1. WOTC encourages businesses to hire qualified veterans and other workers who have historically faced barriers to employment
The WOTC program is a federal tax credit available that incentivizes employers to hire and retain qualified veterans and other individuals from target groups that historically have faced barriers in securing employment. According to the Congressional Research Service:
“The WOTC is designed to incentivize the hiring of employees with certain characteristics by subsidizing a portion of the qualified worker’s wage. If an employer has a choice between hiring two identical applicants, one of whom is eligible for the WOTC and one of whom is not, the employer may opt to hire the WOTC-eligible applicant because employing that worker will have a lower after-tax cost. The credit is structured to provide an advantage to workers from WOTC target groups seeking employment; it is not designed to stimulate the creation of new jobs.”
Specifically, the WOTC program provides employers with a tax credit when they hire qualified job applicants from the following targeted groups: veterans, former felons, vocational rehabilitation referrals, summer youth program participants and recipients of Supplemental Nutrition Assistance Program (SNAP) Supplemental Security Income (SSI), or long-term unemployment benefits, among others.
2. Employers can realize a maximum of $2,400 per qualified WOTC hire
WOTC is jointly administered by the IRS and the US Department of Labor. The tax credit is equal to 40% of up to $6,000 of wages paid to, or incurred on behalf of, an employee who is in their first year of employment; is certified as being a member of a targeted group; and performs at least 400 hours of services for that employer. Employers could realize a maximum of $2,400 per qualified WOTC hire.
Before employers can claim a Work Opportunity Tax Credit, they must first receive certification from a State Workforce Agency (SWA) that the new hire meets the qualifications of one of the target groups within 28 days after the eligible employee begins work.
This is done using IRS Form 8850 and one of two forms from the US Department of Labor (ETA Form 9061 or 9062).
3. The WOTC program requires an employer to collect pre-screening information from the applicant “on or before” the job offer date
To ensure that employers’ hiring decisions can be influenced by an applicant’s WOTC eligibility, the program requires the employer to screen for WOTC categories “on or before” the job offer date. (It is not necessary to receive certification from the state agency prior to making a job offer.) This requirement helps to ensure that the employer’s hiring decisions can be influenced by an applicant’s WOTC eligibility.
There may be confusion surrounding when WOTC screening should occur. Consistent with the WOTC instructions, some employers and service providers pre-screen the WOTC categories before an employer makes any form of job offer which means screening every applicant (requiring WOTC information during the application process via IRS Form 8850).
However, other employers and service providers only screen for WOTC factors after an offer has been made, including contingent offers (i.e., an employment offer that requires a candidate to satisfy additional requirements, such as background screening, drug testing, or completion of onboarding paperwork).
The latter approach goes against the intent of the WOTC. If the screening is only done after the job offer, then WOTC factors are not truly a part of the hiring decision process—but rather, paperwork to complete after the fact.
The Work Opportunity Tax Credit (WOTC) was first created as part of the Small Business Job Protection Act of 1996 and has been extended on a regular basis. In 2021, Congress authorized an extension of WOTC until Dec. 31, 2025.
The Congressional intent of WOTC is clear: to incentivize hiring of applicants in target groups, rather than offer credits to any employer who happens to hire a worker in those job categories. To be effective, WOTC screening cannot be done after an employer has already decided to extend a job offer.
4. By providing employment opportunities, WOTC can reduce government support program costs
By incentivizing the hiring of applicants in the targeted categories, the WOTC program not only benefits these disadvantaged workers but also reduces the burden on government-sponsored support programs. Giving people gainful employment is good for the worker, good for the community and good for the economy.
5. WOTC can help small businesses and local economies
When is a tax credit not just a tax credit? When it helps a business offer more competitive wages. Currently, the U.S. economy has more open jobs than applicants. Companies are having difficulty hiring for stability let alone growth.
Small businesses are at a disadvantage in this labor market, often unable to offer higher wages or benefits. The WOTC program, which has been a valuable hiring driver for larger employers, can help smaller employers too. By subsidizing wages with a tax credit, it can give small businesses more leeway.
The WOTC program can also help small businesses draw from a larger talent pool and encourage small business owners to hire from their own communities, mirroring their customers’ diversity.
Small businesses are the backbone of the US economy, providing employment in their communities. Anything that tax advisors can do to help these clients is good for the community overall because it strengthens the local economy. Clarifying when WOTC screening should occur can help too, by ensuring that all employers regardless of size are leveraging the true intent of the WOTC program and following the same rules.
The impact of WOTC for employers of all sizes is meaningful—more than $2 billion was granted in WOTC credits in 2021 alone. This program has never been more critical than it is now. As the economy continues to recover from the ups and downs caused by the pandemic and global events, small businesses can use the Work Opportunity Tax Credit to ensure all workers have an opportunity to secure gainful employment.
