Confusion over Work Opportunity Tax Credit Program prevents progress

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To get some more details on the Work Opportunity Tax Credit (WOTC) program and its significance to employers in today’s competitive job market, Tax Practice News sat down with Pete Isberg, VP of Government Affairs at ADP. The WOTC program incentivizes employers to hire veterans and other individuals who have traditionally faced obstacles to employment. 

When used correctly, it can boost employment in key groups and nurture diversity, equity and inclusion in organizations.

To realize the program’s value, it is essential to understand how the WOTC works and eliminate confusion surrounding a core element of the program: precisely when an employer must screen a job applicant for qualifying WOTC factors in relation to when the employer makes an offer of employment.

The IRS states that the employer must screen for WOTC “on or before” the job offer date. The confusion lies in what specifically constitutes an offer of employment. Some employers and service providers perform the screening once a contingent offer has been made, while others perform the screening of all applicants prior to making any type of job offer.

The problem with the former is that the employment decision has been made without consideration of WOTC factors, collecting that information only after the job offer is accepted. This seems counter to the intent of the WOTC program, which is to give qualified applicants an advantage if they are in one of the targeted groups.

We caught up with ADP to understand the issue further.

ADP has filed a recommendation with the IRS regarding the Work Opportunity Tax Credit (WOTC) Program. Before we dive in, let’s first review WOTC and how it works. What is the Work Opportunity Tax Credit (WOTC) Program?
The WOTC program is a federal tax credit available to employers who hire and retain qualified veterans and other individuals from target groups that historically have faced barriers in securing employment.

Targeted groups include 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. In 2021, Congress authorized the extension of the WOTC until Dec. 31, 2025.

How does it work for employers in the hiring process?
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. This is done using IRS Form 8850 and one of two forms from the US Department of Labor (ETA Form 9061 or 9062).

The WOTC program requires an employer to collect the pre-screening information in Form 8850 from the applicant “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.

Why is clarification needed?
ADP strongly supports the values and intent of the WOTC program. As the economy continues to recover from the pandemic, providing opportunities for those who face challenges in gaining employment is more critical than ever.

Our concern is that the WOTC program is not fulfilling the intent to incentivize employers to hire applicants within the targeted groups, resulting in:

  • Employers who hire eligible workers without knowing their status receiving a windfall not intended by WOTC 
  • Eligible workers not being hired at all

ADP has interpreted WOTC tax credit compliance to require pre-screening of the categories included in the Form 8850 before an employer makes any form of job offer, as we believe that approach aligns with the overall intent of the program. This is consistent with the clear public policy to incentivize employers to hire job applicants who fall within the eligible categories.

But there is currently some confusion in the market regarding what specifically constitutes an offer of employment. Some providers perform the screening once a contingent offer has been made, while others perform the screening prior to making an offer.

The IRS should more clearly define what constitutes an “offer” of employment, so all providers can administer the program in a uniform fashion. The ultimate goal is to help employers effectively leverage the program to identify candidates from the groups WOTC is designed to help.

What is the impact to the program the way the law is currently written?
When employers screen applicants for WOTC eligibility after any form of job offer (such as a contingent offer) or later, that employer could receive tax credits for hiring employees who were hired for no reason related to the WOTC program.

When employers only screen applicants to whom they have already extended a job offer, those disadvantaged applicants whom the WOTC program is intended to benefit can lose out. Taking their WOTC eligibility into account might have influenced the hiring decision.

Clarification on when the WOTC screening requirement must take place and what constitutes an offer of employment (i.e., formal written offer, verbal offer, conditional or contingent offer) can help mitigate any confusion.

How would this change impact the applicant process?
This would require the applicant to complete IRS Form 8850 and one of two forms from the Department of Labor during the application process, before or at least on the day of any job offer. This will help ensure that the employer is aware of whether the applicant meets the qualifications of one of the targeted groups identified by WOTC prior to an offer being made. Asking for this information after a job offer has been made or even later in the hiring process, negates the purpose of the WOTC program.

What impact could this clarification have?
The impact of WOTC is meaningful: over $2 billion was granted in WOTC credits in 2021 alone. The Congressional intent of WOTC is clear: to incentivize hiring of specified disadvantaged groups, and not simply offer credits to any employer who happened 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.

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