Lack of clarity about when to screen for the Work Opportunity Tax Credit (WOTC) factors makes the tax credit less effective.
Designed to provide more opportunities for workers who have historically faced challenges gaining employment, the WOTC can be a helpful tool for your small business clients. The WOTC helps small businesses to pay more competitive wages, draw from a larger talent pool that other employers may be missing and add workforce diversity that mirrors their communities and customers.
To realize these benefits, it’s essential to understand how the WOTC works and eliminate confusion around a core element of the program: exactly when an employer must screen a job applicant for qualifying WOTC factors in relation to when the employer makes an offer of employment. Due to this confusion, many qualified applicants are not being screened to see if they meet WOTC requirements, reducing the potential impact of the program.
First, let’s review the details and purpose of the WOTC program:
What is the Work Opportunity Tax Credit?
The WOTC program is a federal tax credit that incentivizes employers to hire and retain qualified veterans and other individuals from target groups that historically have faced barriers in securing employment. According to the Congressional Research Service,
“The WOTC is designed to incentivize the hiring of employees with certain characteristics by subsidizing a portion of the qualified worker’s wage. If an employer has a choice between hiring two identical applicants, one of whom is eligible for the WOTC and one of whom is not, the employer may opt to hire the WOTC-eligible applicant because employing that worker will have a lower after-tax cost. The credit is structured to provide an advantage to workers from WOTC target groups seeking employment; it is not designed to stimulate the creation of new jobs.”
In 2021, Congress authorized the extension of the Work Opportunity Tax Credit (WOTC) until December 31, 2025. Specifically, the WOTC program provides employers with a tax credit when they hire qualified job applicants from the following targeted groups: veterans, former felons, vocational rehabilitation referrals, Summer Youth program participants, and recipients of Supplemental Nutrition Assistance Program (SNAP) Supplemental Security Income (SSI), or long-term Unemployment benefits, among others.
Before employers can claim a Work Opportunity Tax Credit, they must first receive certification from a State Workforce Agency (SWA) that the new hire meets the qualifications of one of the target groups. This is done using IRS Form 8850 and one of two forms from the US Department of Labor (ETA Form 9061 or 9062).
When to Screen for WOTC Categories
The WOTC program requires an employer to collect the pre-screening information in Form 8850 from the employee “on or before” the job offer date. (It is not necessary to receive certification from the state agency prior to making a job offer.) This requirement helps to ensure that the employer’s hiring decisions can be influenced by an applicant’s WOTC eligibility.
The problem lies in the timing of the job offer. Some employers and service providers pre-screen the categories included in the Form 8850 before an employer makes any form of job offer. But other employers and service providers only screen for WOTC factors after an offer has been made, including a contingent offer (i.e., an employment offer that requires a candidate to satisfy additional requirements, such as background screening, drug testing, or completion of onboarding paperwork).
However, the intent of WOTC is to help qualified applicants from historically disadvantaged groups get a leg up. If the screening is only conducted after the job offer, then WOTC factors are not truly a part of the hiring decision process. Businesses might receive the tax credit even though it had nothing to do with candidate selection.
The Congressional intent of WOTC is clear: to incentivize hiring of applicants in target groups, rather than offer credits to any employer who happens to hire a worker in those job categories. To be effective, WOTC screening cannot be done after an employer has already decided to extend a job offer.
The Need for Clarity
As a service provider who pays one out of every six Americans, ADP recognizes the need to clarify when the WOTC screening must take place. To ensure the WOTC program meets its true intent, the IRS should more clearly define what constitutes a “job offer” to include any offer, including a verbal, conditional or contingent offer, and any other form of offer of employment.
This clarity can help ensure that the employer is aware of whether the applicant meets the qualifications of one of the targeted groups identified by WOTC prior to an offer being made. Asking for this information after a job offer has been made or even later in the hiring process negates the purpose of the WOTC program. Ultimately, the goal is to help employers effectively leverage the program to identify candidates from the groups WOTC is designed to help.
Why WOTC Works for Small Businesses
Small businesses are the backbone of the American economy. They are key sources of employment in communities across the U.S. Anything that tax advisors can do to help these clients is good for the community overall because it strengthens the local economy. The WOTC can help small businesses offer more competitive wages, fill open positions from a larger talent pool and hire employees who mirror the diversity of their communities and customers.
