Work Opportunity Tax Credit Extended Through 2025

​The Work Opportunity Tax Credit (WOTC)—an incentive for employers to broaden their job applicant pools and hire from certain groups of people who may need assistance finding jobs—has been reauthorized and extended through the end of 2025.The federal tax credit is available to employers that hire and retain individuals from 10 target groups that have been determined to have "significant barriers to employment," such as the long-term unemployed, people with criminal histories and military veterans. About $1 billion in tax credits are claimed each year under the WOTC program, according to the Department of Labor (DOL).

"Nothing in the program itself has changed with the reauthorization," noted Jason Fry, assistant vice president of employer services marketing and product at Equifax Workforce Solutions in Atlanta. "But employers should still figure out which candidates are eligible, make hiring those candidates a priority, get those individuals WOTC-certified and ensure that the new hires work at least 120 hours before claiming the credit," he said.

"The benefits of WOTC for employers can be significant," Fry added. Vendors like Equifax Workforce Solutions and Paycom have WOTC calculators that can help employers understand their potential credits.

"Maximum tax credits range from $2,400 to $9,600, depending on the worker category, number of hours worked and wages earned," said Eric Weiss, human capital management team lead at Paycom, a payroll provider based in Oklahoma City. "Millions of dollars are left on the table each year because employers don't realize it's available."

Rob O'Neill, a partner in the Portland, Ore., office of professional services firm Moss Adams, said, "Due to the impact of COVID-19, many organizations had to reduce their workforce to stay afloat. As businesses begin to reopen or grow in the current economy, programs like the WOTC can help offset the federal income taxes imposed on those businesses."

Background

The WOTC was created in 1996. Three-quarters of the program's beneficiaries are Supplemental Nutrition Assistance Program (also known as food stamps) recipients, based on DOL data. Other eligible worker categories include:

• Unemployed or disabled military veterans.
• Long-term unemployed.
• Temporary Assistance for Needy Families (TANF) recipients.
• Residents living in designated economically struggling communities.
• People with disabilities who have completed or are completing vocational rehabilitation.
• People with criminal histories.
• Supplemental Security Income recipients.
• Teens from designated empowerment zones employed for summer work.

"Both for-profit and nonprofit employers are eligible for WOTC," Weiss said. "The difference comes down to how the credits are applied and the worker categories available. All categories are available for private-sector employers, and any earned credits are applied to their federal liability. Tax-exempt employers can access the program if they hire veterans and can use the credit against the employer's share of Social Security tax. Veteran credits are some of the higher-value credits, so it's a great opportunity for nonprofits."

The exact tax benefit amount that a business can receive depends on several factors, including the worker category, the employee's salary and the number of hours the employee worked in the first year.

It's important to note that the same wages used to calculate WOTC cannot be used to calculate other credits, such as the Employee Retention Tax Credit, Employer Paid Family and Medical Leave Credit, other disaster retention credits, or forgivable Paycheck Protection Program loan proceeds, O'Neill said.

The Importance of Screening Applicants

Aiming to screen all applicants for WOTC eligibility is essential, Fry said. "The trick is to screen early and complete the screening for 100 percent of the new hires in order to better understand the candidate pool and the credit potential."

Data from Equifax Workforce Solutions show that nationally, "somewhere between 20 to 30 percent of a company's employee base could possibly qualify for WOTC," Fry said. Integrating screening software into an applicant tracking system to quickly identify WOTC-eligible candidates can be very useful, experts agreed.

How to Apply for WOTC

The application process involves five steps. Prior to claiming the tax credit with the IRS, an employer must first request and receive certification from its state workforce agency stating that the new hire is a member of at least one of the WOTC target groups. Since the required forms change periodically, ensure that you submit the current approved versions of the forms.

The top reasons for application denials are a lack of proper documentation and workers being deemed ineligible for the credit, according to the IRS.

1. Fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees, and submit a written request to certify a new hire as a member of a WOTC target group.

"The job applicant provides information to the employer or completes the screening information via an automated service on or before the day a job offer is made, and this information is entered on Form 8850," Fry said.

2. Complete ETA Form 9061, the Individual Characteristics Form, which lists the individual characteristics of the worker. Identification documentation may be needed, such as the applicant's driver's license to prove residence, a DD-214 to prove veteran status or a TANF case number.

3. Submit all forms to the state workforce agency within 28 calendar days after the employee's start date. WOTC applications that are not submitted within 28 calendar days will be denied.

4. Receive a determination. The state workforce agency will issue a final determination for each WOTC application. When a certification is received, then the employer can claim the tax credit with the IRS.

"The time it takes to receive a determination can vary greatly," Weiss said. "The average time is between 10 and 12 months. Some states have electronic submission systems and some don't, but the review process itself is still manual, so that takes time."

5. Claim your credit. Generally, an employer elects to take the credit by filing IRS Form 5884, Work Opportunity Credit. However, a tax-exempt organization that hires an employee in the WOTC veteran target group should use IRS Form 5884-C.

Remember, employers must wait until eligible employees work at least 120 hours in the first year of employment before filing and qualifying for the tax credit.

Making WOTC Permanent

A bipartisan group of U.S. senators introduced legislation Feb. 8 that would make WOTC permanent.

"Because of the ongoing COVID-19 pandemic, now more than ever, individuals who are in the shadows are struggling to find meaningful employment," said Sen. Rob Portman, R-Ohio, a sponsor of the bill. "Encouraging employers to hire those who have the most trouble finding work is good policy, and while securing a five-year extension was a positive step, it's critical that we make the Work Opportunity Tax Credit permanent."