“I love paying taxes!”…said no business owner ever. Seeing as how many of these business owners are in the midst of filing their taxes, I thought this would be an ideal time to give a synopsis of one of my favorite topics: Work Opportunity Tax Credits. In my years in the human capital management industry (a term that I admittedly hate), I have received numerous questions from organizations in regards to WOTC:
“Will we qualify for any credits?”… “How much will we get back?”… “How involved is the screening process?” … “How much will this cost me?”… and my all-time favorite, “Is this legal?”
Let’s start from the beginning – what is a Work Opportunity Tax Credit? The Work Opportunity Tax Credit (WOTC) is a Federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment (https://www.irs.gov/businesses/small-businesses-self-employed/work-opportunity-tax-credit). In short, the Department of Labor is allowing for a dollar-for-dollar tax reduction by incentivizing businesses to hire individuals that they have identified as facing impediments to being hired.
This leads to a couple of obvious questions; who are these groups/individuals and how much will your business get back? Certain individuals will be eligible for larger credits, so here’s a breakdown of the recognized WOTC groups along with maximum credits per employee (per year):
- Veterans – $9,600
- SNAP (Food Stamp) Recipients – $2,400
- Ex-Felons – $2,400
- TANF (Temporary Assistance for Needy Families) Recipient – $2,400
- Long-Term TANF Recipient – $9,000
- Designated Community Resident – $2,400
- Long-Term Unemployed – $2,400
- Vocational Rehabilitation Referral – $2,400
- SSI (Supplemental Security Income) Recipient – $2,400
- Summer Youth – $1,200
As you can likely tell from the above breakdown, there are multiple potential qualifying new-hires, and this is no small amount of money. While exact credits that a business will receive back can never be perfectly predicted (amounts are based on a rolling system dependent upon the hours each individual has worked), here are the averages: 1 out of 5 new-hires will qualify for a credit, and the average credit is $1,200-$2,000. So, here is a hypothetical example:
Acme Trucking hires 50 individuals a year. We would estimate that 10 of these individuals (1/5 of 50 = 10) would qualify for a WOTC, with an average credit of $2,000 apiece = $20,000.
So, how does the screening process work and how difficult is it? In short, it is extremely quick and simple. New-hires will answer eight Yes-or-No questions to determine eligibility. There are a few different ways to administer this screening process. The easiest (and one that I encourage all of my clients to utilize) is to add this section on to their normal electronic on-boarding packet. If your company still administers paper on-boarding packets, it’s the same concept, just tack the extra page on. Many WOTC companies even offer the option for new-hires to confidentially call in and answer these questions.
As I mentioned earlier, these credits are accrued on a rolling basis, meaning the more the employee works, the more the company will receive, until they hit their respective max credit amount. The simplest method to track credits is to integrate your payroll provider with your tax credit company. What I mean by that is let’s say the same hypothetical company, Acme Trucking, uses Southern Payroll & Benefits for their payroll. We connect with our industry-leading WOTC partner, so there is nothing that Acme would need to do after the new-hire has been screened – they just sit back and let the credits roll in. What if Acme Trucking does not use SPB to handle their payroll? No problem, Acme Trucking will manually run payroll reports and send them in to their WOTC provider.
So, how much will this cost your business??? This is my favorite part when discussing WOTC with new clients. The majority of WOTC providers will charge a small percentage of total credits, contingency-based. What this means is that your company will not be charged until the IRS has certified your credits. Let me say that again – YOUR COMPANY WILL NOT BE CHARGED UNTIL THE IRS HAS CERTIFIED YOUR TAX CREDITS. Let’s use the Acme Trucking example again, with an expected $20,000 in credits. For math’s sake, let’s suppose that your WOTC provider charges you 20% (again, contingency-based). Acme Trucking will be charged $4,000 (20% of $20,000) total after the IRS has certified these credits, leaving them with a net profit of $16,000.
I hate clichés, but when it comes to WOTC, I can’t resist – This Is Free Money. The Department of Labor has gone out of their way to encourage businesses to hire individuals from the aforementioned groups, why not take full advantage? If you have any questions at all or would like further info, please go ahead and book some time on my calendar so we can discuss your particualr situation and needs. That meeting is free, too!
Southern Payroll & Benefits – CEO
“Your business is more than a number.”