Recent federal tax law extended the Work Opportunity Tax Credit (WOTC) through the end of 2025. This is great news for businesses which generally hire low wage/high turnover positions to meet their labor needs—think restaurants, home healthcare, staffing agencies, construction, hospitality, nursing homes, etc. The WOTC program incentivizes employers to hire those people who often have barriers to employment, are economically disadvantaged, or otherwise have difficulty finding employment. The incentive is in the form of dollar for dollar federal “tax credits” against their federal income tax—–a credit is generally worth far more than a “tax deduction/writeoff.”
The federal government estimates that approximately 2 Million employees fit the eligibility requirements for WOTC credits during 2021, resulting in $5 Billion in federal income tax credits for their employers. Among the “targeted groups” of WOTC-eligible employees (there are 10 categories in total), about 65% of the credits were for employees who were part of a family receiving food stamps as part of the SNAP program, another 20% of the credits were for ex-felons. Veterans generated about 10% of the WOTC credits, with other categories (TANF, SSI recipients, vocational rehab, long-term unemployed) generating about 5% of the total WOTC program tax credits.
TAKE THE WOTC QUIZ – WOULD MY BUSINESS BENEFIT?
- Do we hire any of the following?
- individuals who are part of a household who receives public assistance, such as food stamps?
- individuals who have been unemployed for a long time?
- Is our business profitable and do we pay federal income tax to the IRS?
- Do our positions “turnover” frequently? Is it common for our employees to work for us for 3-10 weeks or so and then terminate—-and we then find replacements?
If you answer “yes” to the above questions, then you likely can generate tax credits by implementing the WOTC program as part of your hiring process.
WHAT ARE THE 10 TARGETED TYPES OF EMPLOYEES WHO QUALIFY FOR THE WOTC TAX CREDITS—DO YOU HIRE APPLICANTS WHO FIT ONE OF THESE CATEGORIES?
The Department of Labor (DOL) has a complete listing of the 10 targeted groups, with definitions in its WOTC Eligibility Desk Aid.
(NOTE—-Rehires do not qualify for the WOTC credit—-no credit if you have previously employed an individual)
HOW MUCH ARE THE WOTC TAX CREDITS?—–THEY ARE SIGNIFICANT IF YOU HIRE SEVERAL TARGETED GROUP NEW HIRES
As a general rule, each category generates a federal tax credit equal to 40% of the first $6,000 of wages earned from you, or $2,400 of tax credit per eligible employee. The 40% credit X $6,000 of wages applies to any WOTC eligible employee who works for you at least 400 hours—-a lower 25% tax credit is generated by any employee who works at least 120 hours for you, but less than 400 hours pre-termination. Some categories, especially, various types of “veterans,” qualify for higher WOTC tax credits, up to $9,600 per eligible WOTC veteran category (vets on food stamp, unemployed vets, disabled vets, etc.)
HOW DO I CLAIM WOTC TAX CREDITS FOR MY BUSINESS?
Here are the KEY STEPS IN PROCURING/CLAIMING WOTC TAX CREDITS YOU ARE ENTITLED TO:
- Have each of your job applicants complete a Form 9061 to determine IF they fit into 1 of the 10 targeted WOTC categories—-most employers include the 9061 “screening form” in their job application package. (This is legal to do!!)
- Hire a job applicant who appears to be included in one of the WOTC categories. (it is legal for an employer to select a candidate who is WOTC eligible over another who is not.)
- Send a WOTC Form 8850 with the 9061 form within 28 days of the hire date to the state WOTC coordinator, who will process the WOTC application claim and notify you of eligible WOTC new hires. (Every state has a WOTC coordinator.)
- Track the hours worked and wages paid for every new hire who is eligible for the WOTC tax credit.
- Calculate the actual WOTC tax credit by year-end for each WOTC eligible new hire—-the credit is based on the WOTC category for the new hire, wages paid and hours worked by the new hire.
- Provide your WOTC calculations to your CPA/tax preparer so they can complete IRS Form 5884 to claim the federal tax credit—the credit is a reduction of corporate tax liability for “C” corporations, and flows to individuals on K-1 schedules from S corporation and partnership returns (or from the Schedule C of a sole proprietor.)
OBSERVATION – Generating maximum WOTC credits is based on having an applicant screening process in place and making sure all paperwork is timely filed.
FINDING TAX CREDITS ON YOUR OWN/INTERNALLY OR OUTSOURCING THE WOTC PROCESS TO THIRD PARTIES
Large employers, such as Walmart, Texas Roadhouse, Krogers, etc. have HR departments who screen and track and procure their WOTC tax credits, along with software developed for managing the entire process. Many to most of small to medium-sized employers will outsource WOTC screening, completion and submitting of the forms, and making the calculations to third parties who specialize in optimizing WOTC tax credits. Most WOTC consulting and procurement firms will handle all of the WOTC program requirements on a contingency basis—-generally a percentage of all WOTC tax credits procured for their client. Many of the WOTC procurement/consulting firms work “hand in hand” with payroll/HR companies since all of the information/figures needed to calculate the credits are in payroll records—-hire date, wages earned and hours worked.
ACCUPAY’S WOTC PARTNERS TO HELP OUR CLIENTS SCREEN AND PROCURE THE WOTC TAX CREDITS THEY ARE ENTITLED TO
AccuPay’s isolved HCM software’s optional onboarding module may be programmed to gather information needed from each new hire to screen and calculate the WOTC tax credit available for each new employee. All WOTC training, system configuration, and tax credit calculations become byproducts of the onboarding module in our payroll system. We also partner with an outside WOTC firm for clients of our Kronos software platform. Each of our WOTC partners charge 20% of the WOTC tax credits they can “find,” leaving the employer with a net 80% of the WOTC tax credit amount. For those employers who have not before screened and procured WOTC tax credits, these credits are like “found money,” tax savings for knowing about the WOTC program and doing the work required to generate the tax credits.
If you feel that your business would save taxes by implementing the WOTC federal program (Take the Quiz at the beginning!!), please reach out to your dedicated payroll specialist at AccuPay or to email@example.com, for more information.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.