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The Work Opportunity Tax Credit (WOTC) can help both employers that are experiencing labor shortages and certain groups of people who need assistance finding jobs, such as the long-term unemployed, ex-offenders and military veterans.
The WOTC is a federal tax credit available to employers that hire and retain individuals from target groups that have been determined to have "significant barriers to employment." Employers can earn a tax credit for each qualifying worker up to $9,600 (for certain military veteran employees). About $1 billion in tax credits are claimed each year under the WOTC program, according to the Department of Labor (DOL).
"WOTC is a win-win for employers and job seekers, as it lowers taxes and encourages" job creation, said Vaughn Hromiko, principal and director of client services at Sacramento, Calif.-based NorCal Tax Credit Advisors and RestaWOTC, specializing in WOTC services for restaurant groups.
"The employer requirements are fairly simple—just hire an eligible worker and submit an application to the state workforce agency to receive the credit," said Laura Molloy, vice president of tax consulting at First Advantage Tax Consulting Services in Indianapolis. "The benefit of taking the WOTC credit is that it can help offset other talent management costs."
[SHRM members-only toolkit: Becoming a Military-Ready Employer]
The WOTC was created in 1996, chiefly as a way to move people from welfare to work, but additional categories of eligibility have been added since, such as veterans in 2011 and the long-term unemployed in 2015. All private-sector employers are eligible for the credit, and the program is currently authorized through 2019. Tax-exempt employers can access the program as well if they hire veterans and can use the credit against the employer's share of Social Security tax, Molloy said.
Use of the credit has grown from 123,000 certifications in 1997 to 1.9 million in 2015, she added. There were 6.8 million applications for the WOTC submitted to state workforce agencies in fiscal year 2015, of which about 2.8 million were still pending and about 4 million applications have been processed. Approximately 2 million of those processed applications were denied, which is about a 48 percent conversion rate. Applications are most frequently denied due to a lack of proper documentation or if workers are deemed not eligible.
The exact tax benefit amount that a business can receive depends on several factors, including:
There is no limit on the number of workers an employer can hire to qualify for credit, but there is a maximum tax credit that can be earned for each target group.
Three-quarters of the program's beneficiaries are Supplemental Nutrition Assistance Program (also known as food stamp) recipients, based on the latest DOL data from 2015. Other eligible worker categories include:
There are no statistics on long-term unemployed recipients yet, as hires for this group began in 2016.
Relatives and dependents of the employer, former employees, and majority owners of the business are not eligible to be claimed as WOTC hires.
The future of the WOTC is unclear. "WOTC is expected to be addressed in congressional tax reform efforts," Molloy said. "The credit fits well under the president's goal of boosting employment and helping people enter the middle class. It also complements workforce development training programs. Challenges include finding funding for it, however, and there is little evidence that there is bipartisan cooperation on the issue."
How to Calculate the WOTC
WOTC hires must work at least 120 hours in the first year of employment for the employer to qualify to claim the tax credit, Molloy said.
"Generally, the credit represents 25 percent of eligible workers' wages who work at least 120 hours in the first year and rises to 40 percent of workers' wages who work in excess of 400 hours during the year. In claiming the credit, you need to reduce the deduction taken for wages paid by the WOTC credit amount during the year to eliminate double dipping," she noted.
Eligible wages vary from $6,000 to $24,000 depending on the category. A long-term unemployed veteran with a disability reflects the greatest credit potential at $9,600.
"The midrange we see is between $1,200 and $1,500 per qualified worker," Molloy said. "Employers with strong retention and a higher wage may see something like $3,500 to $4,500 per certified worker. Remember, the longer the retention period, the more credit you will receive."
Apply for the WOTC
The application process involves five steps. Prior to claiming the tax credit with the Internal Revenue Service (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, it's important to ensure that you submit the current approved versions of the forms.
Step 1: Fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees, and make a written request to certify the new hire as a member of a WOTC target group.
"The job candidate provides basic demographic information and responds to questions about targeted classification on or before the day a job offer is made," Molloy said. "Questions can be gathered via paper questionnaire, a telephone interview or electronically. Paper forms are simple and work well for small businesses. In-person or telephone interviews are convenient, while integration with an applicant tracking system is the most sophisticated and flexible option."
Next, the candidate affirms the veracity of the information by signing the form. "There are often questions about whether certain inquires can be asked prehire, for example around a disability," Molloy said. "Generally, the Americans with Disabilities Act would bar an inquiry into disability status, but the Equal Employment Opportunity Commission has issued its own guidance noting exceptions in certain circumstances, including for the affirmative action purposes of WOTC."
Step 2: Complete ETA Form 9061, the Individual Characteristics Form, which lists the individual characteristics of the worker. Identification documentation may be needed, such as a driver's license of the applicant to prove residence, a DD-214 to prove veteran status or a TANF case number. Use ETA Form 9175 (Long-Term Unemployment Recipient Self-Attestation Form) when there is an absence of unemployment insurance wage records.
Step 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.
Step 4: Receive a determination. The state workforce agency will issue a final determination for each WOTC application. In some cases, assistance may be requested from the employer to obtain additional information or documentation. When a certification is received, then the employer can claim the tax credit with the IRS.
Step 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, Work Opportunity Credit for Qualified Tax-Exempt Organizations Hiring Qualified Veterans.
Remember that employers must wait until the eligible employees work at least 120 hours in the first year of employment before they can file and qualify for the tax credit, Molloy said.
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