How Can Employers Best Use the Work Opportunity Tax Credit?

The nonprofit investigative news outlet ProPublica recently published a scathing report on the use—or, in its estimation, misuse—of the federal Work Opportunity Tax Credit (WOTC). In light of that investigation, employers and staffing agencies may be wondering how to properly take advantage of the tax credit.

When Congress approved the Work Opportunity Tax Credit in 1996, lawmakers intended to spur the full-time hiring and retention of workers from disadvantaged backgrounds. Instead, the $2 billion program is doling out hundreds of millions of dollars per year in subsidies for temporary jobs, the ProPublica investigation found. ProPublica's analysis of WOTC applications in nine states showed that almost one-fourth of the jobs certified for the tax credit between 2018 and 2020 were with staffing agencies.

[SHRM members-only resource: Work Opportunity Tax Credit Express Request]

In the federal government's 2021 budget year, more than 2 million WOTC certifications were issued. For most eligible employees, the maximum tax credit is $2,400.

So how can employers and staffing agencies capitalize on the WOTC without running afoul of the system?

Washington, D.C., employment attorney Ayesha Whyte said it's critical to fill jobs with candidates "who have consistently faced barriers to employment."

"It should not be used just for employers to cut their tax liability," Whyte said. "Employers should earnestly seek to employ the chronically unemployed and give them an opportunity to learn job skills and give them long-term employment."

To receive the minimum tax credit (representing 25 percent of a worker's wages), a company need only employ a worker for 120 hours, or three weeks of full-time work, ProPublica pointed out. Employers can qualify for the maximum credit—40 percent of a worker's wages, up to $2,400—after only 10 weeks.

Employers and staffing agencies that do plan to claim the WOTC must gather the required information from workers, said Eric Sarver, a New York City attorney who specializes in labor and employment law.

"It is vital for staffing firms and employers to make sure that prospective employees or applicants know that they are not required to provide this type of information to any employer. However, if an employee is amenable to the WOTC, then the employer must obtain certification for that individual," Sarver said.

For instance, an employer or staffing agency must gather proof from the state workforce agency that a future employee is a member of one of the WOTC's target groups, such as military veterans and formerly incarcerated people, according to Sarver. In order to secure that proof, IRS Form 8850 must be completed and submitted to the workforce agency. He noted that additional paperwork might be required.

Certified public accountant Paul Miller, managing partner of New York City-based accounting firm Miller & Co. LLP, added that an employer or staffing agency must be consistent "in applying ethics and fairness when hiring candidates that fall within one of the 10 designated WOTC categories of workers."

Furthermore, an employer or staffing agency must keep accurate records for every WOTC-eligible employee, Miller said.

"The biggest challenge for employers may simply be meeting the certification and filing requirements," he said.

For their part, staffing agencies and organizations are pushing back against the findings of the ProPublica investigation. One of those agencies, TrueBlue, placed about 615,000 workers in 2021.

ProPublica said TrueBlue, which owns the day-labor firm PeopleReady, reported receiving tax credits—described as being "primarily" from the WOTC—worth $114 million over the past 10 years. This amounts to 29 percent of its pretax income. Those credits slashed TrueBlue's federal income taxes by 69 percent.

A spokesman for TrueBlue praised the WOTC as a "sound federal program" that extends a "second chance in life" to people who otherwise might be unable to get a job. The temporary jobs that TrueBlue provides thanks to WOTC "offer more than a paycheck," he added.

"These jobs create unique opportunities to learn and strengthen skills as well as provide a path to permanent employment for many who otherwise may face challenges entering the workforce," the spokesman said. "The ability to do this is critical to our mission of connecting people and work and [to] our commitment to nondiscriminatory employment opportunities for all."

Despite the humanitarian intentions of companies like TrueBlue, Whyte noted that some employers and staffing agencies exploit the WOTC program for their own benefit.

Employing a WOTC-qualified person for only one year gives an employer "just enough time to secure the tax credit and then terminate and replace them with another hire to receive the tax credit year after year. This would save an employer approximately 40 percent of an employee's salary every year," Whyte said.

John Egan is a freelance writer based in Austin, Texas.