Everything Organizations Should Know About the Work Opportunity Tax Credit (WOTC)

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(Editor’s Note: Today’s article is brought to you by our friends at ADP, a comprehensive global provider of cloud-based human capital management (HCM) solutions. You can stay up to date on HCM topics with the ADP Spark blog. Check it out when you have a chance. And enjoy the read.)

Just in case you missed it, the Internal Revenue Service (IRS) recently issued an update clarifying the prescreening process of new hires for the Work Opportunity Tax Credit (WOTC). First created by Congress in 1996, the WOTC is a federal tax credit available to employers who invest in American job seekers who have consistently faced barriers to employment. The targeted groups include qualified veterans, ex-felons, qualified Supplemental Nutrition Assistance Program (SNAP) benefit recipients, qualified Supplemental Security Income (SSI) recipients, and qualified long-term unemployed just to name a few. 

With unemployment at record lows and organizations looking to keep recruiting costs in line, I thought this WOTC update might be a good time to refresh ourselves on what the WOTC offers. To help us understand the latest update, I reached out to Bonita Richardson, senior business consultant with ADP’s Tax Credit Services division. Bonita is a specialist in federal and state tax credit and incentives, specifically employment credits. 

Bonita, thanks so much for being here. As it relates to the Work Opportunity Tax Credit (WOTC), how much of a tax credit can an organization receive?

[Richardson] Employers can receive a tax credit of up to $9,600 per qualified new hire, which is equal to 40% of the new hire’s qualified wages, provided the new hire works at least 400 hours during their first year of employment. Eligible employees must work a minimum of 120 hours to qualify. Employees working more than 120 but less than 400 are eligible for a credit of 25%. Rehires are not eligible for the tax credit.  

More than $1B in tax credits are claimed each year under the WOTC program. The credit is limited to the amount of business income tax liability or Social Security tax the employer owes. 

That’s a lot of money for employers. Now that we’re caught up with what the WOTC is and how it works, what changed with this recent IRS update?

[Richardson] The WOTC program requires that applicants are pre-screened on or before the date of the initial job offer. Prescreening is not a new rule but rather the IRS is calling out that the WOTC process has always had prescreening as a requirement. For the IRS to take the time to issue such an update, it signals that they are aware that there are companies screening out of compliance, and it would further imply that this is an area they will audit to ensure compliance.

Some organizations might tell you that screening applicants post hire allows for the client to collect the WOTC credit faster. Under the current IRS guidance, not prescreening places an organization out of compliance. 

That brings up a question. If an organization hasn’t been applying for the WOTC tax credit, does this mean there’s no way to go back and screen those new hires?

[Richardson] That’s correct. The WOTC is a proactive hiring credit and is only available for new employees. That’s because the intent of the program is to provide an employer with some idea that the applicant fits into a WOTC target group before a job offer is made. This way the employer partners with Department of Labor (USDOL) and other areas of government in their goal to help individuals that may have barriers to employment, like long term government assistance recipients or those re-entering the civilian workforce after military service to get back into gainful employment. 

For example, let’s say two individuals apply for the same job and they’re both equally qualified to do the job. One of the applicants is WOTC eligible and the other applicant is not. With all other things being equal, the USDOL encourages the employer to hire the WOTC eligible applicant. By doing so, they’ll not only gain a good employee, they’ll also potentially help that individual get off government assistance and back into a working part of society. More importantly to the IRS, that individual will get back into paying taxes. The government provides an incentive for this partnership in the form of a credit against the company’s federal tax liability.

Additionally, with the way the target groups are created, existing employees likely wouldn’t qualify for the tax credit anyway.

Do you know what happens if an organization has been screening post-hire? Does that mean they’re no longer eligible for the tax credit?

[Richardson] There is a risk that WOTC credits could be overturned upon audit if the IRS discovers that screening is taking place outside of program guidelines. If an organization is screening out of compliance (i.e., after the date of a job offer) for one of their hires, that likely means they are out of compliance with 100% of their WOTC screens. Meaning, 100% of the credit they have received could be revoked.

Some candidates might be concerned about disclosing whether they’re a part of a targeted group. How can organizations encourage candidates to complete the questionnaire?

[Richardson] It has been my experience that most applicants are willing to participate in the WOTC program. Remember, the program has been in place for more than 25 years with most major employers participating in WOTC screening so asking the screening questions isn’t anything new. Introducing WOTC screening that gives a brief description of the program and encourages the applicant to complete the screening without fear of discrimination for their responses is also very helpful.

Last question. Organizations will want to make sure that the WOTC survey is conducted at the right time in their recruiting process. Ideally, when should organizations conduct the pre-screening? 

[Richardson] For most employers the best place to screen for WOTC is when the applicant completes the initial application. This placement captures the screening question responses up-front removing any doubt of program compliance. Look for a place within the application process where inserting WOTC can be transparent to the overall gathering of information. Additionally, be sure the screening process is consistent for all applicants. If possible, don’t try to create separate processes for different parts of the organization as this can confuse the process and create holes in compliance.

Some companies choose to couple WOTC screening at the time the initial job offer is extended but this timing can introduce a risk to compliance. If the applicant waits even one day after receiving the job offer to complete the screening, it becomes invalid, and the credit could be denied. 

The WOTC screening should never be coupled with onboarding or Form I-9 compliance since these activities most often take place after the individual has started work making the screening untimely. 

I want to extend a huge thanks to Bonita for sharing her knowledge with us. If you want to learn more about the Work Opportunity Tax Credit, ADP has a WOTC resource center you can explore. It includes a compliance overview, and a couple of ebooks on the recent IRS update as well as a guide to “Making Employee Screening Simpler”. Definitely worth checking out.

The purpose of today’s article is two-fold: 1) If you weren’t aware of the recent IRS update regarding the WOTC, now you know. And you’ll want to be sure you’re in compliance. And 2) If you weren’t aware that the WOTC existed (or had forgotten about it), this is a good time to get reacquainted. The Work Opportunity Tax Credit can help talented people get jobs and provide organizations a tax credit for doing it. 

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