The Work Opportunity Tax Credit (WOTC) is a federal tax credit provided to employers under the Internal Revenue Code, Section 51, which is administered jointly by the Department of Labor and the IRS. The purpose behind WOTC is to encourage employers to hire job seekers who are experiencing difficulties in finding employment. When an employer hires someone from the WOTC target group, they can claim this tax credit.
What Is the WOTC Program?
Under the Consolidated Appropriations Act of 2021, the WOTC program has been authorized until December 31st, 2025. This means the tax credit for employers is available for wages paid to qualified workers that are employed on or before this date. To claim the credit, employers are required to apply for a certification to the designated workforce agency in their state, which will verify that the newly hired worker belongs to one of the targeted groups.
Once the taxable employer has obtained the necessary certification, they are eligible to claim the work opportunity tax credit as a general business credit. The credit will apply against the employer’s income taxes. Tax exempt employers claim the WOTC federal tax credit against their payroll tax.
A Brief History of the WOTC Program
The Work Opportunity Tax Credit (WOTC) program was launched on October 1st, 1996 to give tax incentives to for-profit employers that would provide employment to qualified individuals from certain targeted groups with historically high rates of joblessness. In addition to the economic goals, the program had a goal to incentivize workplace diversity. Since the introduction of the program, the WOTC has been extended and modified a number of times. In 2006, a similar but separate credit for the recipients of long-term welfare was merged with the WOTC. The program expansions in recent years have led to the total cost of the WOTC to exceed $1 billion.
How Does WOTC Work?
How Much Is the Tax Credit for the WOTC Program?
In general, the Work Opportunity Tax Credit is equal to 40% of up to $6,000 of a qualified worker’s wages, or the wages incurred on their behalf. A qualified individual is someone who is:
- A certified member of one of the target groups.
- Currently in their first year of employment.
- Working for the employer to provide service for at least 400 hours.
At the rate of 40% for a maximum wage of $6,000, the maximum amount of tax credit is typically $2,400. For workers who perform services for at least 120 hours, but less than 400 hours, the applicable rate is 25%. For some qualified veterans, wages of up to $24,000 would be considered for calculating the WOTC.
If a worker has been re-hired, the employer may not claim the WOTC for them. Generally, the employer is allowed to carry the unused WOTC for the current year back one year and thereafter forward up to 20 years.
Who Qualifies for WOTC Credits?
The tax credit WOTC program is available to employers that are for-profit or tax-exempt as long as they hire job-seeking individuals (who consistently faced significant barriers to employment) from one or more of these 10 targeted groups:
- Qualified veterans
- Qualified veterans with disability
- Qualified veterans who are unemployed
- Qualified ex-felons
- Qualified recipients of TANF (Temporary Assistance to Needy Families) formerly known as AFDC (Aid to Families with Dependent Children)
- Qualified recipients of vocational rehabilitation
- Qualified recipients of SNAP (Supplemental Nutrition Assistance Program), formerly known as Food Stamps
- Qualified recipients of SSI (Supplemental Security Income)
- Qualified recipients of long-time family assistance
- Qualified recipients of long-term unemployment
How Does My Business Participate in WOTC to Claim Tax Credits?
Taxable as well as specific tax-exempt employers of all sizes are eligible to participate in the WOTC program. Before an offer of employment is given (or on the day the offer is made), the job candidate as well as the employer are required to complete Form 8850, which constitutes a formal request to claim WOTC.
From the date the new employee begins work, the employer must submit Form 8850 within 28 days to the designated state agency’s local office (state workforce agency in the location where the employee works for the business). The Department of Labor may require additional forms to provide the certification.
Once the employer receives a certification from the local agency confirming that the employee belongs to one of the target groups, the taxable employer should complete Form 5884, while the employer who is tax-exempt will complete Form 5884-C to claim the WOTC.
Wages to Be Considered for Tax Credit
After a worker has been hired, it is important to determine the exact amount of wages that must be counted for WOTC for that worker. In order to qualify for the tax credit, the wages should have been paid in the worker’s first year of employment. Secondly, the worker should have completed at least 120 hours on the job during the first year. In other words, the employer must wait until a worker has accumulated 120 hours of work before filing for the credit.
All payments that the employer has made to the worker during the covered period can be included. The following aspects must be complied with:
The “wages” should be wages on which the employer has paid out federal unemployment tax. The business should have directly paid those wages. If the wages were paid by the business indirectly or were subsidized through a third party, those will not be considered towards the Work Opportunity Tax Credit.
If the worker has completed at least 120 hours on the job in the first year, the employer can claim WOTC of 25%. If they have worked for a minimum of 400 hours, the tax credit of 40% can be claimed. For all types of employee categories, there are different limits of maximum hours for which tax credit can be claimed.
It is noteworthy that the worker wages that have been used to determine eligibility for WOTC cannot also be used for calculating other types of worker tax credits, such as Medical Leave Credits, Paid Family and Medical Leave, Employee Retention Credit, or forgivable loan proceeds under the Paycheck Protection Program.
The Procedure to Apply for WOTC
After the employer has hired an employee, and received a letter from the workforce agency in the state confirming that the employee qualifies, the employer can claim WOTC by submitting an IRS form depending on the type of business. The form to be completed and submitted is as follows:
- IRS Form 5884: If the employer’s firm is a partnership, trust, S corporation, estate or cooperative, they should submit this form.
- IRS Form 3800: All other business owners and taxpayer employers may submit this General Business Credit form.
To complete this form, the employer must calculate the cumulative wages of qualified employees, based on their employee category and the number of hours worked. This figure should be multiplied by the total number of hours an employee has worked during the year. Thereafter, the appropriate percentage (25% or 40%) must be applied to the final figure. The complete form will be added to the employer’s tax return to compute their individual or business income tax liability.
Employers use the WOTC screening process to determine whether a potential new employee may qualify for inclusion in their tax credit calculations. They will consider whether the potential hire belongs to the qualifying category of employees and, in any case, after getting hired the employee should be able to meet the requirements for the minimum number of hours worked.
The job applicant and the employer must complete and submit Form 8850, which is the state workforce agency’s pre-screening form. In addition, Form 9061 from the Department of Labor must be submitted in order to be eligible for the federal tax credit. Once the state workforce agency determines that the worker is qualified, the next step for the employer is to apply for the tax credits to the IRS.
The Impact of WOTC on Business Taxes
Businesses can apply the WOTC to their tax liability for the particular year, along with any other tax credits. The credits must be applied in a specific order. The appropriate tax form to be submitted for claiming the WOTC will depend on the type of business. “Pass-through businesses” where the business profit or loss is passed through to the business owner should include the WOTC application on Form 1040. The maximum amount of tax credit under the WOTC program is limited to the amount of income tax liability of a business or the Social Security tax owed.
How Does the WOTC Affect the Employee?
Employees that qualify under the WOTC program do not receive any financial benefit for being a part of a special category. However, the potential incentive for the employers improves their chances of getting hired. For every qualified employee, the employer may stand to gain a tax credit of anywhere between $1,500 and $9,600. This may be a significant reason for an employer to hire candidates under the WOTC program.
Advantages of WOTC for Employers
Reduction in Federal Income Tax Liability
By making use of the Work Opportunity Tax Credit benefits, an employer can lower their company’s federal tax liability by a substantial extent, or even eliminate it entirely in some cases. However, it’s crucial to remember that the amount of tax credits cannot exceed the total amount of income tax liability of the business.
If the employer does not have any income tax liability, they may still apply for the WOTC. Unused tax credits are allowed to be carried back 12 months as well as carried forward for up to 20 years on future tax returns. This means the employer can use their tax credits at a future date, once they have a corporate income tax liability.
Reduction in the federal tax liability can significantly bring down the costs of doing business for an employer. The savings achieved through the WOTC program could be utilized for business expansion or to finance the company’s core business operations.
Improvement in Cash Flow and Profits
By some estimates, an employee hired under the WOTC program can help boost the business profitability by up to 80% when compared to an equivalent non-qualified employee. With a lower tax bill, the company’s cash flow can improve and there can be a positive impact on the company’s profitability bottom line.
No Restriction on the Number of WOTC-Qualified Workers
The WOTC program imposes no limits on the number of qualified employees that an employer can hire for the purpose of gaining tax credits. No matter whether a company hires 5 or 500 eligible workers, their WOTC tax credits will continue to accumulate and strengthen the financial position of the business.
Large Number of Candidates Are Potentially Eligible
Even if a business has never participated in the federal WOTC program before, there is a fairly high probability that they already have employees or may hire new candidates that qualify under this program. In general, about one in five new employees are eligible for this tax credit in most industries. The qualifying rate may be even higher in certain industries.
The Department of Labor data shows that in 2018, the number of new hires under the WOTC program was 5.6 million. Consider the average rate of WOTC eligibility of about 20%, it amounts to nearly $2.5 billion in tax credits for that period that taxable employers could claim.
Businesses Should Recognize the Benefits of Participating in WOTC Program
According to market analysts, less than 50% of eligible employers participate in state or federal incentive programs, such as Work Opportunity Tax Credit. Although the pandemic increased the trend of companies taking advantage of government-backed initiatives to support business, many companies continue to miss out on the potential leverage they can gain from tax credit programs such as WOTC.
Lack of knowledge as well as lack of experience are two primary reasons why companies across all geographical locations may be lagging behind in participation in these programs. At the top management level, many business decision makers express unawareness about whether their company is utilizing the tax incentives such as WOTC. Some business owners say that they are unsure whether their company qualifies for these benefits. This reflects a significant lack of awareness that results in missed opportunities for qualifying businesses.
While at the outset, it may appear that the WOTC program involves complicated procedures to take advantage of the tax incentives, the advancements in automation and customization of services by firms such as Quentelle have made it much easier and faster. When companies team up with Quentelle to maximize their WOTC advantage, it will likely improve their profits consistently year after year.
It is worth it for companies to check through their HR departments to find out whether they qualify for WOTC benefits. An appointment with one of the knowledgeable team members at Quentelle can help business decision makers – including managers, CEOs and business owners – understand how technology can make the WOTC process simplified, compliant, and cost-effective. The message from Quentelle is clear – no business should miss out on tax credits just because they did not seek the professional opinion from a specialist.
How to Increase Employer Participation in WOTC with Quentelle?
From an employer’s perspective, maximizing WOTC benefits can be a time-consuming process. To stay compliant and to make the most of the program, the employers are required to deal with a number of challenges, including completing thorough paperwork, keeping diligent records, monitoring wages and hours worked, meeting the state agency deadlines, preparing meticulous documentation to support the WOTC claims, and accurately computing and recording the tax credits.
To complete this entire administrative process in-house, the employer may have to allocate considerable time, resources, and talent. Employers are often reluctant because getting involved in this process may distract their teams from the core business activities. However, there is a practical solution to avoid the complexities related to WOTC tax credit handling, and stop losing out on significant tax credit benefits.
By partnering with Quentelle, employers can relieve their in-house HR teams from the burden of WOTC administration and streamline the complete process using Quentelle’s automated platform. This enables an employer to maximize their legitimate tax credit opportunities without compromising their core business activity and without increasing their staff or administrative expenses.
The Quentelle platform not only speeds up the process to ensure the state agency submission deadlines are always met, it also improves the accuracy of information and documentation to ensure full compliance with the federal and state WOTC regulations. Make Quentelle a seamless part of your WOTC tax credit process, and improve your bottom line, while redirecting your own team’s energies towards more productive and creative business operations.
Partner with Quentelle to Boost Your Profits and Productivity
Quentelle, in conjunction with the leading tax credits specialist Walton, has created a win-win for employers to maximize their tax credits, while diversifying their workforce by hiring employees that qualify for the WOTC program. Employers who otherwise might be reluctant to hire workers from certain eligible categories for various reasons can have the opportunity to gain in tax credits when they utilize the benefits of WOTC by teaming up with Quentelle.
Many employers are increasing their profitability and cash flow and saving millions of dollars in business tax liability by participating in the WOTC program. At the same time, providing employment to eligible workers from the disadvantaged categories helps strengthen the company’s value system and work culture, improves employee morale, and bolsters the company’s reputation as a socially responsible organization.
With the cutting-edge digital platform technology from Quentelle, WOTC is no longer a paper intensive, cumbersome, and time-consuming process for employers. Quentelle’s advanced solutions from Walton have simplified the entire process, while making it faster and more accurate at the same time. By partnering with Quentelle, a business can leverage the excellent WOTC benefits and improve their productivity, profitability, and cash flow.
Overcome the Hurdles to WOTC Benefits with Quentelle
Is your organization missing out on potential WOTC benefits because it is unwilling to commit in-house resources to this tedious and resource intensive process? Let Quentelle help you make the most of your rightful WOTC opportunity, while freeing up your resources and talent from the onerous responsibilities of filling out and submitting forms within deadlines, preparing support documentation and records, and ensuring compliance with the law.
Considering that the IRS only gives you 28 days for the submission of the required documentation, traditional labor-intensive approaches to WOTC administration can prove to be costly and error-ridden. In particular, when your company is hiring a large number of new workers, completing and tracking the WOTC paper trails can be even more daunting. This is where Quentelle, in partnership with Walton, is helping employers replace their manual in-house WOTC process with its automated platform service.
Quentelle’s professional support and service for WOTC tax credits begins with the introduction of a small questionnaire as part of the hiring process to identify all the eligible candidates. The automated screening and onboarding process with the digital platform capabilities of Quentelle lets your company eliminate the burden of in-house identification and processing of tax credits. This reduces the demands of time and effort on your HR teams, while ensuring that your business enjoys maximum tax credit benefits.
Let Quentelle Turn WOTC to Your Business Advantage
Ever since the WOTC program came into existence in 1996, it has continually evolved and gained acceptance as a useful tool to promote more equitable job creation, while rewarding employers for their participation in this endeavor. Companies of any size can be eligible to receive Work Opportunity Tax Credits. There is no cap on how much an organization may earn by way of WOTC, as long as it does not exceed their income tax liability.
Employers that were hesitant in the past to make use of this federal government-backed incentive because of the administrative hurdles involved are now joining hands with Quentelle to make the most of the WOTC program. With Quentelle’s digital platform and automation of the WOTC process, you no longer have to worry about missed tax credits, high error rates, delays in submission of forms and documents, and dissatisfied HR staff burdened with a manual process.
With the platform capabilities of Quentelle to streamline the administrative WOTC process, it is easy to efficiently capture and maximize tax credits where you are eligible while staying compliant with the ever-changing regulatory requirements. When you partner with Quentelle, your organization will begin to generate significant tax savings, which you can channel to more productive areas of your business to gain a durable competitive advantage.
Here are some of the key benefits of automating the WOTC tax credit process with Quentelle:
When you perform the administrative tasks related to WOTC tax credits in-house, you have to hire skilled staff dedicated to perform this process. This can significantly increase your HR expenses. On the other hand, when you move your tax credit management and handling responsibilities to Quentelle, you get access to industry-leading technology, streamlined business processes, and significantly lower costs.
This is possible because the experienced professionals backed by the automation platform capabilities of Quentelle can perform the same tasks much faster, more accurately, and at a lower cost to your organization. Moreover, you will also save money because you no longer have to make continued investments in updating and maintaining the internal infrastructure needed to carry out the same tasks in-house.
Higher Speed and Accuracy
With the cutting-edge digital systems of Quentelle along with a team of trained professionals, the time taken to complete forms and paperwork, prepare support documents, and track and store employee data is substantially cut down. When the entire WOTC process is handled in-house using traditional methods, it becomes far more time-consuming, taking away the focus and attention of your teams that could otherwise have been utilized for core business activities.
When employers try to cut down the time spent on the tax credit process in-house, it is likely to cause higher dissatisfaction among the responsible HR teams. At the same time, the risk of errors increases when there are tight deadlines to be met. With Quentelle, you get the advantage of speed combined with accuracy. The automated system makes the manual and repetitive processes much faster, while the trained WOTC experts minimize the chances of errors because they are updated with the latest changes in regulations and stay current with the process.
Customized and Reliable Services
As a customer-centric platform, Quentelle is committed to helping your organization meet its unique requirements related to tax credits and other peripheral items. It has the agility and flexibility to tailor its services and adjust them to your changing business needs. This flexible approach lets you utilize Quentelle’s services based on your current organizational demands. This provides you superior cost efficiency to achieve maximum financial benefit.
Reliability is one of the high points when you choose a top-rated platform such as Quentelle. The company follows industry best practices and has put in place robust systems to enable timely communication and reporting, and to deliver fast, secure, and satisfactory outcomes for all customer requests. Because the teams at Quentelle are specialized in the tasks they perform, they can ensure high-quality performance and full compliance with the regulatory requirements.
What Does WOTC Mean for My Company’s Human Resources Infrastructure?
The WOTC program is valuable for any eligible employer not just because it can help improve the business bottom line, but also because it bolsters the company’s human resources infrastructure and its reputation as a responsible employer. Used correctly, WOTC has the potential to strengthen the objectives of inclusion and workplace diversity in a business organization.
Employee morale is often higher in organizations where people are hired from the widest possible cross-section of the available talent pool. Worker turnover rates are reduced and productivity per employee is likely to improve in these organizations. Moreover, when the employer includes a WOTC survey as part of their application process, the HR team can gain better insights into the opportunities for diversity and multiple skill sets and experiences that may be available.
What Should I Look for in an HR Platform that Integrates WOTC Functionality?
As an employer, you need a proven and established service provider with an advanced HR platform that fully integrates WOTC functionality. The integration will streamline your HR process, minimize the scope for errors, and deliver faster and more cost-effective results. Choose an HR platform that is intuitive, user-friendly, and is designed to make the WOTC integration incredibly simple.
Top-Rated WOTC Solution Provider
Quentelle, through its partnership with a leading employment tax credits provider Walton, provides a streamlined solution that makes the task of screening Work Opportunity Tax Credits easy and efficient. When you administer a short, but proven questionnaire as part of your organization’s process of hiring or onboarding, it enables Walton to quickly and accurately determine eligibility and pursue WOTC and other tax credits for your business.
Simplified Screening, Unmatched Results
Quentelle makes the screening process simple by leveraging the power of Walton. Walton utilizes a number of integrations with dedicated Applicant Tracking, Job On-Boarding, and Payroll Taxes service providers. This gives Walton the ability to automate the WOTC screening process and deliver a fast and friendly user experience while optimizing results. With support from Quentelle and the cutting-edge solutions from Walton, you can increase your tax savings, ease the workload of your team, and strengthen your human resources infrastructure.
Partner with Quentelle for Winning HR Tech Solutions
Is your company spending too much time and effort trying to navigate the Work Opportunity Tax Credit (WOTC)? Let Quentelle do the heavy lifting for you and help you achieve superior operational efficiency in multiple HR tasks with our award-winning technology platform. A growing number of companies are choosing Quentelle’s suite of proven and innovative solutions. To schedule a demo, call us at (888) 565-5515 or simply fill out this online contact form and we will respond as soon as possible.