Understanding Work Opportunity Tax Credits (WOTC) 

There are several Federal hiring incentive programs in the United States. One of these programs and perhaps the one with the longest tenure is WOTC, which stands for Work Opportunity Tax Credit. This program is designed to promote workplace diversity by hiring individuals who typically face barriers to secure employment.

More about WOTC:

The Work Opportunity Tax Credit provides a Federal tax credit to employers who hire and retain individuals from certain target groups. The goal is to increase workplace diversity and help people who have particular difficulty finding sustainable employment.  In the current version of the program, the target groups are as follow:

  • IV-A recipients. These are individuals whose  family is receiving TANF. To qualify, assistance must have been received for a 9-month period during the past 18 months.
  • Veterans whose families are receiving SNAP or who have been employed for four consecutive weeks or at least 6 non-consecutive months in the last year. It also includes disabled veterans.
  • Ex-felons hired within a year of conviction or release.
  • Designated community residents, that is people who live in select impoverished communities such as Rural Renewal communities.  To qualify, they must continue to live in those communities.
  • Individuals referred to Vocational Rehabilitation.
  • 16-17 year olds seeking summer jobs who live in one of the impoverished communities.
  • SNAP recipients. (Supplemental Nutritional Assistance Program – also known as food stamps)
  • SSI recipients. (Supplemental Security Income)
  • Long-term family assistance recipients.
  • Long-term unemployment recipients.

As you can see, the credit is a direct reward for hiring somebody who might otherwise have had problems finding and securing a job. It maxes out at the amount of business income tax liability or social security tax owed. It can be applied as a credit against business income tax liability.

What is Changing with WOTC?

Despite the rollercoaster ride 2020 has proven to be, we end the year on a high note. The 11th hour agreement reached by lawmakers on Sunday, December 20 will include a renewal of the Work Opportunity Tax Credit (WOTC)  through December 31, 2025.

The $900 billion COVID-Relief package, H.R. 133, “Consolidated Appropriations Act, 2021”  also includes host of provisions and programs within the bill, designed to provide relief to businesses impacted by the pandemic. The House of Representatives overwhelmingly voted to pass the bill 359-53 just hours after the final legislative text was released to members. The Senate followed suit by passing this bill with a 92-6 vote.

“Securing a long-term extension of WOTC was the right thing to do, as it ensures job applicants a chance to secure sustainable employment and gives companies an opportunity to find good talent and offset their corporate taxes as they recover from the impact of the pandemic.” said Phil Ownbey, President of Walton Management Services.  

While we hoped the renewal would also add pandemic-focused target groups, this extension does not include any changes to the program. However, this buys us some time to regroup and strategize our lobbying with the incoming administration.

Will the Pandemic Affect WOTC?

One key question is the potential effect of the COVID-19 pandemic and resulting economic disruption on WOTC. It’s clear that the pandemic makes extending the credit even more important. As the pandemic ends and recovery begins, encouraging employers to hire people who lost their jobs at the start of it and have been struggling since is likely to speed recovery, especially in disadvantaged areas.

The incoming administration has promised a better plan for dealing with the pandemic and depending on what happens with Congress, this could involve changes to WOTC. Two big changes might be considered:

  1. An audit of Empowerment zones and Renewal communities to potentially add towns and neighborhoods that have been particularly badly hit.
  2. The potential addition of more target groups. For example, COVID-19 is resulting in long-term sequelae for many patients, but most of these patients are getting better, if slowly. Many of these long COVID sufferers have lost their jobs and for those who do recover, finding new employment might be tough. Creating a temporary target group could be one way to assist them back into the workplace. Target groups might also be created to assist people in industries that were particularly hard hit.

Adjusting WOTC can be an easy way to incentivize employers to help bring back those who have been particularly hard hit by the pandemic, which has disproportionately affected minority communities.

How Do You Get WOTC?

Applying for the credit is simple, and there’s two ways to do it. In some cases state or local workforce agencies will provide qualified workers with a pre-certified form that they can give to you. Or if you believe your new employee falls into a target group, then you can fill out an individual-characteristics information form that explains how the person falls into a target group.

You then fill out a certification request form, obtainable from the IRS. It’s Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This must be provided to the state workforce agency within 28 days of your worker’s first day. Assuming that the request is approved by the state agency by way of certifying the employee, you will then be able to add the credit to Form 3800 as a general business credit. You will also need to file Form 5884. If you are tax-exempt, you need to instead file Form 5884-C to get a credit against employer social security tax.

Some employers find out about WOTC for the first time when a new hire shows their eligibility form, but the intent of the program is to encourage you to seek out people who need a job badly and bring in people you might not have thought to hire.

If you are looking for tax breaks and also a way to help bring new and interesting viewpoints into your office, the Work Opportunity Tax Credit gives you a solid incentive to hire less traditional employees. It is, however, complex to understand. Quentelle’s human resource bundle can help with this and other employment-related tax issues. Contact us to find out more about our human resources software and how we can help you simplify employment and tax issues, including all point-of-hire credits.

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