If you’re like most of us, a complicated-sounding topic like the Work Opportunity Tax Credit gives you the jitters. You might even want to escape. I can promise, however, you wouldn’t be the first to make that mistake.
Please, don’t let that happen now. Stay with me, and I’ll do my best to make this easy. And besides, you might gain an excellent chance to reduce your income tax for the next five years!
What is WOTC?
The Work Opportunity Tax Credit, often called WOTC (pronounce watt-see), has been around since 1996. Untold thousands of employers big and small have used it to save billions of dollars in taxes.
Because it is a so-called “tax extender,” we depend on Congress to re-authorize WOTC every few years. In December 2020, President Trump and Congress approved the Consolidated Appropriations Act and extended the WOTC program for five more years. This act gave employers the ‘Okay’ to continue saving WOTC tax dollars by giving people jobs.
WOTC is offered to employers anywhere in the United States when they hire a member of a WOTC “target group.” That means that the employee was experiencing a circumstance (like unemployment) that made them WOTC-eligible before hire.
I’ll explain more details later. For now, I hope you will understand that eligible employees are regular people from all walks of life. If your business does any regular hiring at all, you probably already employ WOTC-eligible workers and are missing out on the tax benefits—that is not good. It’s like buying a house and paying a mortgage with thousands of dollars in interest but failing to claim the interest deduction on your annual tax return. Does this describe your company and WOTC?
How Valuable Is WOTC?
Your WOTC tax credit equals a percentage of what you pay your WOTC-eligible employees. The amount of compensation you can use in that calculation depends on why the employee qualified in the first place. As a result, the maximum tax credit varies between $1,200 and $9,600 per qualifying hire. There is no limit to the number of qualifying employees you can hire and, therefore, no limit to the amount of tax credit you can earn.
Many employers who pay attention find that between 10% and 20% of the people they already hire are WOTC eligible. Although it is not required, you can increase your tax benefits by proactively recruiting more eligible people.
Which Employees Qualify?—WOTC Target Groups
The WOTC program lays out fourteen circumstances, or target groups, that qualify an employee for the tax credit. Before I tell you about them, I need to warn you. A common gut reaction goes something like, “I don’t think we hire any of those people!”
That could be true. Your organization might be an exception. But most employers already have WOTC employees in their workforce and continue to hire more.
Take, for example, the SNAP recipients target group. SNAP stands for Supplemental Nutrition Assistance Program. Between January and June last year, almost 20% of California households received SNAP assistance. If your business recruits workers in California, there’s a good chance you have been hiring WOTC-eligible SNAP recipients without even knowing it.
Here’s the list of target groups. For our current purpose, rather than laying out technical definitions, I am sticking to general descriptions and showing how much your business can earn for each.
As the founder of a WOTC services firm, I observe a constant stream of qualifying employees hired by our customers. We process new WOTC applications for SNAP recipients, TANF recipients, veterans, ex-felons, and others every day. Their employers really do earn thousands of dollars in tax reductions. Some earn hundreds of thousands every year.
The WOTC Process
To claim a WOTC tax credit, you must first obtain a certification letter from your state workforce agency for each qualifying employee. In California, that’s the California Employment Development Department (or EDD). Every state has its own agency dedicated to WOTC certifications.
From ten thousand feet up, the process looks like this:
- Collect eligibility information from employees on or before the day of their job offer.
- If someone qualifies, apply to your state workforce agency for certification. In some cases, you’ll need to fortify the application with proof of the employee’s eligibility.
- After receiving certification letters, calculate the tax credit amount based on each qualifying employee’s compensation.
- Claim the resulting tax credit on your annual federal income tax return using IRS Forms 5884 and 3800.
How to Really Succeed at WOTC
Your success will depend on your HR department understanding the nitty-gritty details and setting up an effective process. Those details are beyond the scope of a short article like this one. In fact, the editor has limited me to 1,000 words, and I just now hit word number 947.
Like so many business issues we grapple with today, your best approach is probably to hire a WOTC expert unless your company has extraordinary resources. The right service provider can make it so easy you’ll probably forget it’s happening—until you see the savings show up on your tax return each year.
Vaughn Hromiko, MBA, MS/MIS, is the founder of WOTC Planet. WOTC Planet serves employers in 38 states (and growing), providing noticeably personal service without the big vendor attitude. www.wotcplanet.com, 800.655.5281 x705, firstname.lastname@example.org