The Work Opportunity Tax Credit (WOTC) is a federal program that incentivizes employers to hire people from certain target groups who face barriers to employment.
“The credit is meant to change behavior and encourage companies to take a chance on those who have barriers to entry in the workforce. It’s designed to give these individuals an opportunity at landing a job,” says Terracina Maxwell, COO at Clarus Solutions.
There’s no limit on the number of qualified individuals a company can hire, which makes it a significant option for companies willing to add a screening phase to their hiring process. Still, companies balk, often because they’re concerned about being accused of discrimination, that the administrative requirement is too time-consuming, or because of the uncertainty that the credit will be renewed by Congress.
Smart Business spoke with Maxwell about the state of the credit and why employers should give it a second look.
What is the value of the WOTC to an employer? Is it worth it?
The tax credit, depending on the category of person to whom it applies, can allow a company to claim between $2,400 and $9,600 per person. Companies that do a lot of hiring — especially those that hire hourly workers — would benefit from adding a stage to their hiring process to determine if a candidate qualifies for the credit.
Employers are only given a tax credit, which is based on hours worked, for a qualifying employee in their first year of hire. This is because Congress is incentivizing hiring — staying on the job for more than a year is great, but this credit is an attempt to give people a chance at a job.
Companies of any size or type may participate, and the target groups defined by Congress include those on government assistance programs, veterans, the disabled, felons and the long-term unemployed.
How difficult is it to collect on WOTCs?
Although this is a federal tax credit, it is administered at the state level. And because there is a lot of back-office paperwork that must be completed to file for WOTCs, it’s often an outsourced function. It requires a lot of interaction with the state workforce administrator, and can be cumbersome for small companies or companies that operate in multiple states.
Many think applying for the credit is too much work. That’s justified, as historically all screening had to be done with pen and paper — and it was a lot of paperwork. After 2012, companies were allowed to administer it with electronic signatures and that has significantly decreased the amount of paperwork involved.
While the WOTC has existed since 1996, it would often expire at the end of each year, requiring Congress to re-enact it. This past year, however, Congress renewed it through 2019, allowing companies to confidently set up a process to screen for this credit as a part of their hiring process.
Is there a maximum amount of WOTCs an employer can collect?
There is no maximum WOTC an employer can collect. Congress wants many people in the designated groups to get hired.
It’s a nonrefundable credit, so a company in a net loss position with no tax liability will not be able to use the tax credit in the year it is earned. The credit will, however, carry forward for 20 years until a profitable position is reached.
Should employers be concerned that qualifying questions for WOTCs could be misconstrued as discrimination?
Individuals within the groups targeted for WOTCs can be hired without the risk of the employer facing allegations of discrimination if the employer uses IRS-approved forms or asks only the questions identified therein. Concerned employers can turn to the Department of Labor, which has created guidelines describing what an employer can ask and in what way.
Secondly, by law, applicants must voluntarily supply the required information. Tell candidates that there is no negative consequence for leaving it blank, and if they do answer it won’t affect their pay. Usually only a small percentage of applicants pass on completing the WOTC screening.
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