There were many changes to tax law in the recent tax reform legislation passed by Congress in December 2017. One important program remained untouched, however, the Work Opportunity Tax Credit (WOTC), which will remain in place until at least the end of 2019.
The WOTC is a voluntary federal tax credit administered by the Employment and Training Administration, which is part of the U.S. Department of Labor. The program is designed to encourage businesses to hire individuals who fall into one of nine target groups that typically experience significant barriers to employment. These include military veterans, disadvantaged workers within the federal poverty level, the disabled, long-term unemployment recipients, and teens from Empowerment Zones for summer employment.
An organization can hire as many WOTC eligible individuals as it likes. There is no limit to the number of tax credits for which a business can apply. WOTC can translate into significant tax credits for businesses, with tax credits ranging between $1,200 and $9,600 per employee, depending on the target group and the number of hours worked in the first year. Employees must work at least 120 hours in the first year of employment for businesses to receive the tax credit.
There is flexibility in how the tax credits are applied. They can be applied quarterly and annually against income tax liability. Unused credits can be carried forward 20 years, or carried back one year, depending on a client’s situation. They also can help offset any Alternative Minimum Tax.
The WOTC process is relatively straightforward. Job applicants must fall within a target group recognized as eligible for WOTC. Potential screening methods to determine eligibility include the use of paper forms, online platforms, or on the phone with the job applicant’s participation. Some applicants will complete the WOTC application using a call center, which increases the likelihood of obtaining the most complete information required by the program.
Within 28 days of the employee’s start date, businesses must submit this WOTC information to their local state workforce agency, or SWA, using IRS Form 8850, Pre-Screening Notice, and Certification Request for the Work Opportunity Credit. Businesses also should complete and submit ETA Form 9061 or ETA Form 9062 if the employee has been conditionally certified as falling into a WOTC target group by the SWA, Vocational Rehabilitation Agency, or another participating agency.
The final determination from the SWA will indicate whether the employee is certified as meeting the eligibility for one of the WOTC target groups. Upon certification, the tax credit using Form 5884 and Form 3800 may be filed with the IRS.
The processing time to have a request for certification approved by an SWA can range from less than six months to more than 18 months, depending on the state in which you are applying. The most recently available statistics indicate the states with the fastest processing times are Alabama, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Massachusetts, New Jersey, New York, Ohio, Oregon, South Dakota, Tennessee, Texas, Vermont, Virginia, and Washington. States with the longest lead times are Alaska, Connecticut, Maine, Montana, Nevada, Rhode Island, Oregon, Vermont, West Virginia, Wisconsin, and Wyoming.
Often, businesses use a third-party provider to handle the WOTC process. Here are some things to consider when looking for expert assistance:
• What screening methods will the third-party provider use? Most will offer a combination of paper filing, WOTC call center, and online solutions. Call center operations tend to offer much higher qualifying ratios than other methods.
• What metrics will they use to measure success? How and how often will they report on these metrics?
• What expertise do they have in communicating with SWAs?
• Do they use e-sign technology to make it easier for employees to provide information, thus maximizing participation?
The WOTC program is a great benefit to communities because it encourages businesses to employ individuals who are under economic duress or are finding it difficult to gain meaningful employment. These businesses receive positive credit in the community while generating considerable tax savings and improved cash flow.