What is the Work Opportunity Tax Credit program and how can business owners benefit from it?
Are you taking advantage of the Work Opportunity Tax Credit, commonly referred to as WOTC? What investments in your business could you make if your business tax rate was cut in half, or even to 0%? The purpose of this blog post is to show U.S. business owners how to reduce their effective business tax rate using the Work Opportunity Tax Credit (WOTC) program.
WOTC is a secret bullet that most business owners aren’t aware.
In fact, only 8% of U.S. businesses are aware that the WOTC program exists.
Deputy’s Workforce Management Scheduling Software has integrated with a WOTC provider to make this program more accessible.
Below are dead simple FAQs to understand more about the WOTC program and how the integration makes it super easy to manage.
What is the WOTC program?
The Work Opportunity Tax Credit program (WOTC) is a U.S. Federal tax incentive program designed for employers to hire and put to work individuals who typically have barriers to employment.
- The credit offers employers $2,400 = $9,600 per qualified new hire.
- The employee must complete form 8850 before the first hour of work is completed.
- Employers must then put the employee to work — the credit begins accruing at ~120 hours and caps out at ~400 hours worked.
Why should U.S. businesses care?
Let’s run the math.
If you have a retail business with 50 employees and a 65% turnover rate (that is the actual turnover rate for retailers!), then you’ll hire 32 new employees to maintain the 50 employee level.
If 30% of those employees are WOTC eligible at the lowest credit level of $2,400, your business will earn $23,400 in tax credits.
Whatever business you operate, 10-40% of hourly workers are eligible.
Quick facts on the WOTC program
The credit is non-reimbursable, meaning you can drive your business tax liability to 0% and the credit overages carry over for 20 years, but you won’t be paid the difference.
- The WOTC program was extended through 2019 in the Omnibus budget of December 2016.
- There is no limit to the number of employees that can be eligible per business.
- An employee may be eligible for multiple businesses but each employee is only eligible once per EIN.
- Nonprofits may apply for the tax credits against portions of their payroll taxes.
- Professional Employer Organizations (PEOs) and Staffing agencies can apply for the credits as long as they are considered the ‘Common Law’ employer in that state. If the employee is then hired directly by the company they represent that employer might also be eligible for the WOTC credit.
What are the common mistakes employers make when running the WOTC program?
- Timing — Employees must complete form 8850 prior to working their first day.
- WOTC vs Retention Credit — During the economic downturn, an employment retention credit was passed for employers to maintain certain staffing levels. Many businesses confuse the two and believe the WOTC program is no longer active
- Submission — A business must submit the form to the respective state and federal entities within 28 days of hire.
Will the type of employees I’m hiring qualify?
Yes. 20-40% of hourly new hires in the restaurant, retail, and hospitality sector qualify. This certification rate remains consistent with most other hourly workforces.
Below are the primary categories along with the corresponding maximum tax credit.
- Veterans (up to $9,600)
- Short-term TANF Recipients ($2,400)
- Long-term TANF Recipients ($9,600)
- SNAP (Food Stamp) Recipients ($2,400)
- Designated Community Residents living in Empowerment Zones or Rural Renewal Counties ($2,400)
- Vocational Rehabilitation Referral ($2,400)
- Ex-felons ($2,400)
- Supplemental Security Income Recipients ($2,400)
- Summer Youth Employee living in Empowerment Zones ($1,200)
- Individuals unemployed for 27 weeks
Employees who are family members or re-hires are not eligible.
How are the credits calculated?
There are three factors:
- How much the employee earns
- The target group of the individual hires
- The number of hours worked during the first year of employment.
From the DOL website:
For the long-term Temporary Assistance for Needy Families (TANF) Recipient target group, the credit is available to employers through the second year of employment after the employee works at least 400 hours. The employer may claim a tax credit equal to $9,000 total over a two-year period, as follows:
- 40% of first-year wages, up to the maximum credit of $4,000, and
- 50% of second-year wages, up to the maximum tax credit of $5,000.
For all other target groups, employees must work at least 120 hours in the first year of employment for the employer to qualify to claim the tax credit with the Internal Revenue Service (IRS). The tax credit is generally calculated as follows.
- After working at least 120 hours, the employer may claim a tax credit equal to 25% of the new hire’s first year of qualified wages. The maximum tax credit on first-year wages is between $750 and $6,000, depending on the eligible target group.
- After working at least 400 hours, the employer may claim a tax credit equal to 40% of the new hire’s first year of wages. The maximum tax credit on first-year wages is between $1,200 and $9,600, depending on the eligible target group.
What are the forms needed?
There are no paper or manual forms required if using the Deputy + TC Services program.
If filing manually, these forms will help.
Include these in your new hire paperwork:
5884 – Employers file this form to claim the work opportunity credit for qualified first- and/or second-year wages they paid to or incurred for targeted group employees during the tax year.
5884-C – Qualified tax-exempt organizations use this form claim the work opportunity credit for qualified first-year wages paid to qualified veterans.
ETA 9062 – Conditional Certification Form if the employee has been conditionally certified as belonging to a WOTC target group by a state workforce agency, Vocational Rehabilitation agency, or another participating agency.
ETA 9175 – For new WOTC target group, Long-Term Unemployment Recipients, complete Long-Term Unemployment Recipient Self-Attestation Form when there is an absence of UI wage records.
How long does it take to receive a credit once submitted?
If filing manually, the Certification process can take a few weeks to over a year depending on the state.
If filing through the Deputy + TC Services program, the process is dramatically reduced to often weeks.
Once I manually submit OR TC Services submits, then what?
If you submit manually or electronically you’ll receive three types of updates:
- Certification – allows qualified wages to be applied against the calculation of the credit.
- Denial – the corresponding state has determined that the employee does not meet one of the requirements
- Needs Letter – the state is requesting additional information. Without that information, the Certification is unable to be completed.
How does the Deputy + TC Services USA integration work?
Step 1: Run WOTC Check using TC Services SaaS Platform
Option 1: Manually add an Employee by having them complete the form with a unique link for your business.
Option 2: Send a new hire a unique link via email to complete. Customize the email.
Step 2: Training tag updated when an employee is WOTC Certified.
Deputy uses a ‘Training Tag’ that applies to each employee profile when an employee has been ‘certified’ (Certified = eligible for a tax credit!). The first tag that you’ll see is ‘WOTC Pending’ — this is when the form has been completed but the determination of if the employee is WOTC certified has not yet been completed.
The employee profile is automatically added to Deputy when the employee is added to the TC Services platform.
Step 3: Prioritize scheduling WOTC Certified employees at the point of scheduling.
Type ‘WOTC Certified’ to auto-sort employees who are certified. Assign these employees first so they achieve the minimum 120 hours or work to begin accruing the credit.
Step 4: Auto-track hours worked, wages, and credit accruals
Within the TC Services login, import hours worked for each employee to see total hours and wages worked, as well as the exact credits that you’ve accrued.
Is there a cost to enroll, submit, and redeem WOTC certificates?
There is no cost to use the WOTC program.
Any business can have employees complete form 8850 before the first day of work and businesses can submit this paperwork to their respective states.
Enrolling and submitting for credits using the TC Services platform is also free.
TC Services charges a 20% redemption fee based on the value of the credit ONLY when they have secured the credit for you.
For Deputy customers and prospective customers, there is no cost for the integration.
I’m a current Deputy customer, how do I sign up for TC Services WOTC program?
Step 2: Once TC Services confirms your account, they will connect your Deputy account using Deputy’s API. You may be asked to add a ‘dummy’ employee under a name/email address so that TC Services can log into to your account to complete this one-time process. Alternatively, you can do a live screen share with TC Services and they can walk you through the process.
Step 3: TC Services will reply via email when the Deputy + WOTC Portal is connected.
Step 4: Begin running WOTC checks for all your new hires!
I’m a technology reseller, partner, accountant, HR professional or PEO/ASO — can I offer this program to my clients?
Both Deputy and TC Services provide ongoing subscription fees/incentives for referring new customers.
Increasingly, organizations are moving away from manual entry of data and manually manipulating spreadsheets towards a more efficient cloud-based software approach.
Deputy provides built-in scheduling so you can easily create schedules, assign employees to shifts or shifts to employees, and sync schedules with payroll data to ensure accurate pay and control labor costs. To learn more, schedule a customized demo below to see it in action.
The information contained in this article is general in nature and you should consider whether the information is appropriate to your needs. Legal and other matters referred to in this article are of a general nature only and are based on Deputy's interpretation of laws existing at the time and should not be relied on in place of professional advice. Deputy is not responsible for the content of any site owned by a third party that may be linked to this article and no warranty is made by us concerning the suitability, accuracy or timeliness of the content of any site that may be linked to this article. Deputy disclaims all liability (except for any liability which by law cannot be excluded) for any error, inaccuracy, or omission from the information contained in this article and any loss or damage suffered by any person directly or indirectly through relying on this information.