The WOTC (Work Opportunity Tax Credit) offers businesses a tremendous opportunity for tax credits based on hiring. But for organizations to participate and leverage the advantages of this federal program, they have to be in compliance. That means prescreening applicants. Given the recent update released by the IRS that clarifies the need to prescreen, the time is now to learn more.
As with so many complex tax credits and other regulations today, successfully navigating them requires not only understanding how to stay within the bounds, but then how to create a process to make it part of your hiring system.
A Tax Credit and a Boost
The Work Opportunity Tax Credit (WOTC) was first introduced in 1996. Since then it’s gone through a number of changes and extensions, including incorporating a credit for long-term welfare recipients in 2006. It’s authorized to stay in effect until December 31, 2025, so it’s anything but a flash in the pan: it’s a well-institutionalized regulation.
It’s designed to be both a tax credit for employers and a boost for employees, a combination of business advantage and social good. Companies who hire those American job seekers who consistently face barriers to employment can see up to $9,600 per employee — depending on a number of factors. In turn, qualifying new hires get the chance to break free from depending on government assistance and become self-supporting, steady earners and contributing taxpayers.
Leveraging the WOTC means respecting it: in its intent, the WOTC is designed to lift the barriers to employment among specific groups, and that’s why it includes specific criteria for compliance. It’s also opening up wider talent pools for employers at a time when hiring is tight, to say the least — and this should be seen as an added opportunity.
For larger companies that hire in numbers, it could be a windfall if done right. For smaller businesses it can make a tangible difference in a hiring budget: for every 4 or 5 new hires who fit within the target group, you may have the means to hire another employee as well.
Employees need to belong to a list of targeted groups, as specified by the IRS, and jobs must entail a minimum of working hours. Pay attention to the descriptions as well as the durations specified in each (adapted here):
Qualified IV-A Recipient:
- A member of a family that receives state assistance under IV-A of the Social Security Act providing Temporary Assistance for Needy Families (TANF)
- Assistance must be received for any 9 months during the 18-month period, ending on the hiring date.
- A member of a family that receives assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least a 3-month period during the 15-month period, ending on the hiring date, or
- Unemployed for a total of at least 4 weeks (consecutive or not), but less than 6 months in the 1-year period, ending on the hiring date, or
- Unemployed for a total of at least 6 months (consecutive or not) in the 1-year period ending on the hiring date, or
- Entitled to compensation for a service-connected disability and hired not more than 1 year after being discharged or released from active duty in the U.S. Armed Forces, or
- Entitled to compensation for a service-connected disability and unemployed for at least 6 months (consecutive or not) in the 1-year period ending on the hiring date.
- Hired within a year of either being convicted of a felony, or
- Released from prison for the felony.
Designated Community Resident (DCR):
- At least 18 and under 40 years of age, with a principal residence either in an Empowerment Zone (EZ) or
- A Rural Renewal County (RRC).
- The WOTC credit doesn’t cover wages paid or incurred for services performed while the person lived outside of an EZ or RRC. (You can find the latest list of EZ and RRC designations here.)
Vocational Rehabilitation Referral:
- Has a physical or mental disability and was referred to the employer while receiving or upon completion of rehabilitative services under:
- A state plan approved under the Rehabilitation Act of 1973, or
- An Employment Network Plan under the Ticket to Work program, or
- A Department of Veteran Affairs program.
Qualified Summer Youth Employee:
- At least 16 but under 18 years of age on the hiring date or on May 1 (whichever is later), and
- Only working for the employer between May 1 and September 15 (not employed prior to May 1) and
- Lives in an Empowerment Zone (EZ).
Qualified Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient:
- At least 18 but under 40 on the date of hire, and
- A member of a family that received SNAP benefits for either the last 6 months or at least 3 of the last 5 months.
Qualified Supplemental Security Income (SSI) Recipient:
- Received SSI benefits for any month ending within the 60-day period that ends on the hire date.
Long-Term Family Assistance Recipient:
- At the time of hiring, is a member of a family that meets one of the following conditions:
- Received assistance under an IV-A program for a minimum of the prior 18 consecutive months, or
- Received assistance under an IV-A program for a minimum 18-month period beginning after 8/5/1997, and it has not been more than 2 years since the end of the earliest of such 18-month period, or
- Ceased to be eligible for assistance under an IV-A program up to but no more than 2 years before because a federal or state law limited the maximum time those assistance payments could be made.
Qualified Long-Term Unemployment Recipient:
- Unemployed for not less than 27 consecutive weeks at the time of hiring
- Received unemployment compensation during some or all of the unemployment period.
How to Certify
Eligibility for WOTC is not as simple as just hiring a member of one of these underrepresented talent pools and receiving a credit. As with many federal programs, the devil is in the details — and you can’t certify after the fact.
The IRS recently published additional guidance that clarifies the need to prescreen, and how to do it. As the update notes, “To satisfy the requirement to pre-screen a job applicant, on or before the day a job offer is made, a pre-screening notice (Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit) must be completed by the job applicant and the employer.
To reiterate, both employer and job applicant need to complete Form 8850 in advance. Certification has to happen before you can claim this tax credit, which means establishing that the employee you hired is indeed a member of one of the targeted groups on the list.
And there’s more: employees in the targeted list qualify as long as they work at least 120 hours — any less, and the hire isn’t in compliance. Employers also can’t claim the tax credit for rehired employees (it’s not that much of a stretch to imagine that some employers might think they could rehire an employee in order to certify them for the WOTC).
While the maximum credit is $9600 for an eligible employee, the amount of credit an employer receives depends on the WOTC target group identified, as well as how many hours the employee works:
- If the employee works at least 400 hours during the first year of employment, the tax credit equals 40% of the employee’s qualified wages.
- If the employee works less than 400 hours but at least 120 hours, the credit equals 25% of the employee’s qualified wages.
- Eligible employees MUST work a minimum of 120 hours to qualify.
Reading Between the Lines
It means something that the IRS releases an update clarifying its rules on prescreening. Clearly, there were issues being found in terms of when employers were screening: noncompliance was on the radar. Compound that with wanting to increase participation in the program, and likely a decision was made that it was time to set the record straight. Again, complying with the WOTC could mean a major windfall for a larger employer and a key difference in the budget for a smaller one.
But many employers may have been caught in a blind spot. Some have been customarily conducting certain screening processes post-hire, considering the practice a viable shortcut. The intention may be to assume the new employee qualifies, since there has been some due diligence on the part of the employer already. Another assumption may be that by certifying after the hire is complete, the credits will come sooner. But both approaches are wrong.
For one thing, Form 8850 covers specific information in a specific way in order to certify a hire — and as such, is far more effective in terms of fact-finding for WOTC compliance. From an HR standpoint, since both employer and job applicant need to fill out the form, there may be more incentive for the applicant to get all the information right if it helps boost their getting hired. And minor missteps can really add up, putting companies at greater risk, and great costs stemming from an accumulation of noncompliant hires.
Getting the Process Right
Simply making the shift to when an employer conducts screening and sends in their certification request, and then keeping clear and adequate records to stay in compliance would make all the difference. Here’s what you need to know:
Recruit potentially eligible candidates through the state workforce agency (SWA) or the local employment office. Then, screen them: the applicants need to answer the questions on page 1 of IRS Form 8850 on or before the job offer date.
If the applicant is eligible (they qualify for one of the WOTC target groups), the next step is up to the employer. Employers must sign and submit the IRS Form 8850 — as well as Department of Labor (DOL) ETA Form 9061 or 9062 to the state workforce agency (SWA) within 28 calendar days of the new hire’s start date.
Keep careful records of hours worked and qualified wages paid. Remember: WOTC-certified employees need to work at least 120 hours in the first year of hire.
Claim the tax credit using IRS Form 5884, and make sure you have not only accurate records but copies of all the forms and supporting documents submitted to the SWA. Keep tracking your employee’s hours in case the IRS wants to conduct an audit.
Better Practices, Better Results
Remember: audits potentially contributed to the IRS’ decision to publish an update with clarifying language on the need to prescreen. It’s clear some employers weren’t being compliant. The line in the sand has already been drawn. But it’s also possible that not all employers are aware of the ramifications of being out of compliance with the WOTC.
Not only does post-screening forfeit initial benefits, but there’s an overall risk of having the WOTC credit revoked if an employer is found to have systematically not complied with prescreening requirements. In a big company that is always hiring, that could be a disaster.
The solution isn’t to hope for the best here. It’s to lean on solutions that help you make the shift without adding complexity. An integrated solution can make it far easier to change a long-held process consistently across the board. But given the historic lack of clarity on compliance and why shortcuts won’t work, this may be the time to look for better guidance.
The Benefits of an Outside Provider
Consider partnering with an outsourced solution provider who has experience with prescreening. A solution provider who has a solid track record with successful prescreening will be able to create a better process that’s streamlined and efficient. They can help get your organization over the common hurdles and build better ways to ease the pain points.
Given the pressures organizations are under — from intensely competitive hiring to a need to scale and adapt within shorter windows than ever — being able to leverage the advantage of the WOTC could be a key differentiator.
Minimizing your organizational exposure to risk is never a bad idea. But having a well-run, successful, WOTC-compliant hiring program may do even more. It’s a huge boost to its employer reputation that could pay off in a steady talent pool and a great workforce.
EDITOR’S NOTE: ADP has developed additional information about the WOTC and how employers can apply it. Learn more here