Maximizing the Work Opportunity Tax Credit
Employers have an opportunity to optimize their hiring processes and reduce their costs via a tax credit designed to spur the hiring of people who often face barriers to employment.
Jason Fry, Senior Director, Equifax Workforce Solutions
As many employers strive to optimize their hiring processes and reduce their costs, The Work Opportunity Tax Credit presents a unique opportunity to do both. Through this federal tax-credit program, employers receive income-tax incentives for hiring individuals from a defined set of target groups that often face barriers to employment, such as unemployed veterans, those on government assistance programs, and other individuals who may encounter difficulty finding a job.
Employers who hire WOTC-eligible employees can earn an income tax credit of up to $2,400 per hire for most target groups, and up to $9,600 for some select categories. As the government regularly adds new categories of individuals to the legislation, employers have more opportunities to receive tax credits while helping qualified candidates find meaningful employment.
Despite the benefits, the WOTC program is not a permanent tax credit within the Income Tax Code; it expires periodically and enters a hiatus period until reauthorized by an act of Congress. As the program was on hiatus through all of 2015, many employers simply chose not to invest the time and resources needed to screen their applicants during this time, given the uncertainty about when WOTC would be reinstated. However, with the passage of the Protecting Americans from Tax Hikes (PATH) Act of 2015, WOTC has been reinstated for five years, including one year retroactively. As a result, employers have the chance to recapture tax credits that may have gone unclaimed since Jan. 1, 2015.
What WOTC Renewal Means for Employers
Since the prolonged hiatus of the WOTC program and ongoing uncertainty affecting employers hiring and tax planning strategies, the IRS has issued its Notice 2016-22, providing transition relief for employers that need more time to submit WOTC certification requests for any employee hired between January 1, 2015 and May 31, 2016. Regardless of whether or not employers have participated in the WOTC program in the past, this retroactive WOTC guidance offers them a new opportunity to recapture more than a years worth of missed credit.
The PATH Act also introduced a new category of WOTC-eligible employees: long-term-unemployed individuals who received unemployment compensation. To qualify, the eligible employee must have been in a period of unemployment for no less than 27 consecutive weeks and have received unemployment compensation under federal or state law. This new category applies to employees hired on or after Jan. 1, 2016.
Employers seeking to benefit from this transitional relief period will need to submit all relevant forms to the state workforce agencies by June 29, 2016, rather than the traditional 28-day filing deadline following a new hires start date. This allows employers to go back in time and rescreen employees hired from the beginning of 2015 for tax credits that may have been unclaimed during the WOTC hiatus. It also gives them the chance to rescreen individuals hired since the beginning of 2016 for the new long-term-unemployed category.
The Right Approach to WOTC
While WOTC provides the opportunity to gain significant tax credits, understanding the requirements to submit and to identify and screen them correctly can be challenging. And if not done effectively, employers may leave serious money on the table. So, how can you comply with WOTC? Consider the following steps:
Identification: The WOTC process begins with identifying those newly hired employees who are eligible for tax credits. This can be done through paper forms, phone screenings or web screenings the latter two being particularly helpful for employees at remote locations.
Verification: In the verification stage, IRS Form 8850, which identifies the targeted group the new hire is part of, must be completed and submitted to the appropriate state workforce agency. Document capture is also a crucial part of this stage, and the company must collect third-party validation to show that the individual is, indeed, qualified for WOTC.
Certification: The document requesting WOTC certification must be sent to the state workforce agency, along with all associated paperwork.
Reporting: Tracking and reporting on the results of the WOTC program is key to continually improving the screening process and compliance. Doing so will also enable the company to track how much it receives in tax credits, further validating the value of the program.
Maximize Results and Recapture Missed Credit
Whether a company has long been involved in the WOTC program, or is looking into it for the first time, the issuance of IRS Notice 2016-22 and the ability to submit new hires for WOTC retroactively provides a unique opportunity to collect tax credits. By determining which new hires onboarded since Jan. 1, 2015 may be eligible, companies can benefit from significant tax savings and with the newest WOTC category for long-term unemployed, they have even more opportunities to maximize their returns. To benefit fully from the program, companies must understand its intricacies and the various compliance requirements.
Jason Fry has more than 18 years of experience in pre-employment regulatory compliance with specific focus in employee screening and work eligibility verification. As a senior director at Equifax Workforce Solutions, he is responsible for guiding the strategic direction and financial performance of the state and federal tax credits and incentives services. Fry received his law degree from Georgia State University and is a member of the State Bar of Georgia.