Many small businesses might be uninformed or overlook the Work Opportunity Tax Credit (WOTC), thinking it primarily benefits large companies that engage in mass hiring. However, the WOTC can provide significant tax savings and incentives, especially when small businesses hire from specific target groups. Small businesses, with less federal tax liability than large employers, can see a substantial impact from utilizing this credit and don’t need a big-company HRIS to manage it if they have the right practices in place. This is one of many tax credit opportunities for businesses across Ohio and beyond, and complements other Ohio state-specific tax credits around job expansion.
The administrative burden of processing payroll-dependent tax credits often drive businesses away from pursuing them. An HR Strategist’s role is to inform clients of the potential returns from this credit, implement an effective standard operating procedure, and treat this as a critical part of HR operations. It brings a generous return on our clients’ largest expense, their labor, and contributes to the financial instability brought by turnover. It’s important to have an expert explain the WOTC to your CPA, or your CFO to walk through the positive impact this tax credit presents for financial planning.
Understanding the WOTC
The Work Opportunity Tax Credit is a federal tax credit available to employers for hiring individuals from certain target groups who have faced significant barriers to employment. The vast majority of employers already have employees who qualify as eligible for these target groups today, whether they know it or not. The primary groups include:
- Veterans:
- Up to $9,600 for veterans with service-related disabilities.
- Up to $5,600 for other eligible veterans.
- TANF (Temporary Assistance for Needy Families) recipients:
- Up to $9,000 over a two-year period.
- SNAP (Supplemental Nutrition Assistance Program) recipients:
- Up to $2,400.
- Designated community residents (living in Empowerment Zones or Rural Renewal Counties):
- Up to $2,400.
- Vocational rehabilitation referrals:
- Up to $2,400.
- Ex-felons:
- Up to $2,400.
- SSI (Supplemental Security Income) recipients:
- Up to $2,400.
- Long-term unemployed individuals:
- Up to $2,400.
The goal of the WOTC is to incentivize employers to provide opportunities to these individuals, fostering diversity and inclusion in the workplace. Some companies take a strategic approach to target these qualifying candidates to reap the benefits(for example, initiatives to attract veterans), while others simply establish a process to track and qualify for this credit without any change to their hiring strategy or decisions.
Steps to Obtain the WOTC
- Identify Eligible Employees: Employers must identify individuals from the specified target groups. This can be done through the hiring process by including questions related to WOTC eligibility in job applications or during interviews.
- Pre-Screening Notice and Certification Request:
- Complete IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” by the day the job offer is made.
- Complete ETA Form 9061 or ETA Form 9062, which provides additional information about the employee and their eligibility.
- Submit these forms to the State Workforce Agency (SWA) within 28 days of the employee’s start date.
- Certification: The SWA will review the documentation and, if the employee is found to be eligible, they will issue a certification to the employer.
Calculating the Tax Credit
The amount of the tax credit depends on the employee’s wages and the number of hours worked:
- Qualified Wages: Generally, the first $6,000 of wages paid to the employee during their first year of employment.
- Percentage of Qualified Wages: The credit is typically 25% of qualified first-year wages for employees working at least 120 hours but less than 400 hours, and 40% for those working 400 hours or more.
For example:
- If an eligible employee works at least 400 hours and earns $6,000 in the first year, the credit would be 40% of $6,000, which equals $2,400.
- If the employee works between 120 and 399 hours, the credit would be 25% of $6,000, which equals $1,500.
Applying the Tax Credit
The credit can be claimed against the employer’s federal income tax liability. It’s important to note that the WOTC is a non-refundable tax credit, meaning it can reduce the employer’s tax liability to zero but cannot result in a refund unless it is carried back to the prior year.
Steps to Claim the Credit
- Filing for the Credit: Employers claim the credit by filing IRS Form 5884, “Work Opportunity Credit,” and attaching it to their federal income tax return (Form 1040, 1040-SR, 1040-NR, 1040-SS, or 1040-PR for individuals, or the applicable business tax return forms for corporations, partnerships, etc.).
- Carryover and Carryback: If the credit exceeds the tax liability for the year, the unused credit can be carried back one year or forward up to 20 years, applying the unused portion to past or future tax returns.
Best Fit Industries for WOTC
Some industries are particularly well-suited for leveraging the WOTC due to their hiring patterns and workforce needs. These industries include:
- Retail: Often hires entry-level employees, many of whom may come from target groups such as designated community residents and SNAP recipients.
- Hospitality: High turnover and seasonal hiring make it an ideal fit for the WOTC, especially for hiring veterans, ex-felons, and TANF recipients.
- Manufacturing: Regular hiring of diverse and often lower-skilled labor, including vocational rehabilitation referrals and long-term unemployed individuals.
- Healthcare: Constant demand for staff, including support roles that can be filled by individuals from target groups such as SNAP recipients, TANF recipients, and SSI recipients.
- Food Service: Similar to hospitality, with frequent hiring and high turnover, suitable for veterans, ex-felons, and designated community residents.
- Construction: Frequently hires veterans and ex-felons, providing opportunities for those re-entering the workforce.
Best Practices for Managing WOTC In-House
Managing the WOTC process can be streamlined with the following best practices:
- Establish a Standard Operating Procedure (SOP):
- Create a detailed SOP for identifying, screening, and processing WOTC-eligible employees.
- Ensure all relevant staff are trained on the SOP and understand their roles in the process.
- Utilize Technology:
- Invest in software solutions that can automate parts of the WOTC process, such as tracking employee eligibility and managing forms.
- Consider using payroll or HR software that integrates WOTC processing.
- Outsource When Necessary:
- There are service providers who specialize in WOTC processing and will handle it for a percentage of the credit earned. This can be a risk-free option, as their fees are contingent on successfully securing the credit.
- Regular Audits:
- Conduct regular audits of your WOTC process to ensure compliance, consistency in the rate of capturing/completing the forms, and identify areas for improvement.
Conclusion
The Work Opportunity Tax Credit is a valuable but often underutilized tool for small businesses. By understanding the steps to obtain the WOTC, calculating and applying the credit, and implementing best practices, businesses can significantly benefit financially while also supporting individuals who face barriers to employment. Whether handled in-house with a strong SOP or through specialized service providers, the WOTC can provide substantial tax savings and foster a more inclusive workforce.
For more detailed guidance on leveraging the WOTC, businesses should consult with a tax professional or explore HR solutions that specialize in WOTC processing. This proactive approach can unlock significant financial benefits and contribute to a diverse and thriving workplace.
About Full Speed HR
Full Speed HR is a premier HR strategy firm based in Columbus, Ohio, specializing in strategic planning, talent acquisition, employee benefits, HRIS & PEO consulting, and payroll processing for small businesses. Expertise in small business tax credits, including Ohio tax credits, ensures that clients maximize financial benefits and optimize their workforce. Contact us today to discovery how we can transform your HR strategy, and drive your business forward at full speed.
Disclaimer: This article is for general informational purposes only and does not constitute professional tax advice. While efforts are made to ensure accuracy, we do not guarantee the completeness or reliability of the information. Consult a qualified tax professional for specific advice.