Employers may want to consider the Work Opportunity Tax Credit (WOTC) for new hires. WOTC is a federal income tax credit available to employers that hire individuals from targeted groups that have traditionally faced barriers to employment.
The Veterans Opportunity to Work to Hire Heroes Act of 2011 (“VOW to Hire Heroes Act”) expanded the tax credit for veterans and the Protecting Americans from Tax Hikes of 2015 (“PATH Act”) extended WOTC through December 31, 2019. A qualified veteran is a veteran certified as any of the following: Employers receive a credit in the range of $2,400 to $9,600 per employee depending on the category, hours worked, and wages paid. WOTC is also available to tax-exempt organizations described in IRC § 501(c). These organizations may claim the credit against the employer’s portion of Social Security tax by hiring qualified veterans.
Don’t let WOTC eligibility misconceptions keep you from realizing this powerful tax benefit
The Work Opportunity Tax Credit (WOTC) is a point-of-hire tax credit that can help employers offset the cost of new employees, yet many employers fail to take advantage of the credit because of a variety of misconceptions. With WOTC now extended through 2019 as part of legislation signed on Dec. 18, 2015, it’s time for employers to take a new look at their eligibility for WOTC—and at the myths that have kept too many of them from filing.
Myth 1: WOTC isn’t worth it because it will take forever to receive any benefit
For a number of years, this was true. WOTC had to be renewed on an annual basis. Congress often delayed action on WOTC and other credits until at or even after year-end, and then would implement them retroactively. At that point, businesses had to scramble to pull together information for the entire year, and the states, which process WOTC applications, would be flooded with a year’s worth of forms all at once. Delays were inevitable and often very lengthy. Now, however, with the WOTC extended for five years, businesses can file in real time, which will speed up processing at the state level significantly.
Myth 2: We don’t hire people who qualify
WOTC started life as the Welfare to Work program, and many employers still mistakenly believe that it is limited to welfare recipients.
That’s not the case. WOTC applies to numerous classes of hires, including:
• Unemployed veterans (including disabled veterans)
• Temporary Assistance for Needy Families (TANF) recipients
• Supplemental Nutrition Assistance Program (SNAP) recipients
• Designated Community residents (living in Empowerment Zones or Rural Renewal Counties)
• Vocational rehabilitation referred individuals
• Supplemental Security Income (SSI) recipients
• Summer youth employees (living in Empowerment Zones)
• Long-term unemployed
When you consider that more than 45 million Americans currently receive food stamps, you begin to understand that more employees qualify for WOTC than you might have thought. But without investigating your workforce, it’s impossible to determine your company’s WOTC eligibility and how many qualifying employees you may have.
Myth 3: It’s illegal to even ask employees if they qualify—or, if not illegal, at least intrusive
This is a legitimate but not insurmountable concern. Yes, asking applicants if they fall into some of the WOTC categories during the hiring process would violate employment law, but this is not an insurmountable issue. Many companies work with outside vendors to screen and process WOTC applications. Most vendors use phone or online tools that allow employees to self-identify their classification. The vendor then processes and submits Forms 8850 and 9061 for the employer.
Myth 4: We’re a flow-through entity—we won’t qualify for WOTC
WOTC is available to most entities, not just C corporations. Partnerships, S corporations and other flow-through entities are eligible. These general business credits can be applied against the alternative minimum tax and flow to K1s.
Myth 5: We are required to use paper screening to screen all employees
Historically, in order to gather the required WOTC information and submit it to each state’s labor department, an employee was required to sign Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. This process added more of a burden to the hiring manager’s workload and many companies determined that the cost versus benefit was not worth implementing WOTC. However, in 2012 the IRS issued procedures accepting electronic signatures. As a result, companies are now able to screen employees via phone and Web-based processes with each method taking less than five minutes to complete. The employee electronically signs the required forms necessary to submit and virtually nothing further is required from the employee or employer except confirmation of start date and wage.
The amount of the credit you can receive for any given employee depends on WOTC category, compensation and other factors, but can range as high as $9,600 for some disabled veterans. In our experience, an average of $2,000 per credit is useful as a rule of thumb in most cases. Whatever the amount, though, don’t let the above myths keep you from investigating WOTC eligibility.
If you need assistance, please call us and we will find available veterans for you.