The Work Opportunity Tax Credit Updates

At Interactive Accountants our small business CPAs believe it’s important to inform our clients about the updates to the Work Opportunity Tax Credit (WOTC) that may affect them as small business owners– so, we have all you need to know about the WOTC and how to adhere to the guidelines outlined by the government.

September 2022 Work Opportunity Tax Credit Updates

Last year, the Consolidated Appropriations Act of 2021 extended the Work Opportunity Tax Credit till December 31, 2025.

In September 2022, the IRS posted an update to the Work Opportunity Tax Credit (WOTC), and as a small business owner, you can continue to see benefits by employing American workers who have faced barriers to gaining employment in the past. Despite not making any major policy changes to the tax credit program, some of the language used in the policy has been adjusted.

The section of the text updated by the IRS focuses on the pre-screening methods of employees. While nothing of importance has changed in the policy itself, it’s important to take note of the phrasing edited by the IRS.

“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 Credits) must be completed by the job applicant and the employer.”

There are 4 dates that must be provided before Form 8850 can be submitted:

• The date of when the applicant gave information.
• The date of when the employer offered the job to the applicant.
• The date of hire.
• The date the new employee began work.

Prior to recent updates, the paperwork needed to be filed for WOTC within 21 days of the date the employee began work, but now this has been updated to a date within 28 days of the start of work.

Background of the Work Opportunity Tax Credit Program

The WOTC was created in 1996 as an incentive for American business owners to hire employees who have faced obstacles in securing employment. Three-quarters of the program's beneficiaries are Supplemental Nutrition Assistance Program (commonly called “food stamps”) recipients, based on DOL data.

Other eligible worker categories include:

• Unemployed or disabled military veterans.
• Long-term unemployed individuals.
• Temporary Assistance for Needy Families (TANF) recipients.
• Residents living in designated economically struggling communities.
• People with disabilities who have completed or are completing vocational rehabilitation.
• People with criminal histories.
• Supplemental Security Income recipients.
• Teens from designated empowerment zones who are employed for summer work.

What Types of Employers are Eligible to Receive the WOTC?

Both for-profit and nonprofit employers are eligible for WOTC. The difference between how each business structure claims the tax credit comes down to how the credits are applied and the worker categories available.

All categories are available for private-sector employers, and any earned credits can be applied to either their corporate or personal federal tax liability, depending on the type of tax return filed. Tax-exempt employers can access the program if they hire veterans and can use the credit against the employer's share of Social Security tax. Veteran credits are some of the higher-value credits, so it's a great opportunity for business owners to employ people who have served their country.

The exact tax benefit amount that a business can receive depends on several factors, including the worker category, the employee's salary, and the number of hours the employee worked in the first year. Speaking with a local certified public accountant (CPA) with experience working with clients claiming WOTC on their returns can help you get a more individualized view of the type of tax advantages you and your business can receive.

It's important to note that the same wages used to calculate WOTC cannot be used to calculate other credits, such as the Employee Retention Tax Credit, Employer Paid Family and Medical Leave Credit, other disaster retention credits, or forgivable Paycheck Protection Program loan proceeds.

The Importance of Screening Applicants

Aiming to screen all applicants for WOTC eligibility is essential. The trick is to screen early and complete the screening for 100 percent of the new hires in order to better understand the candidate pool and the credit potential.

Data from Equifax Workforce Solutions shows that nationally, somewhere between 20 to 30 percent of a company's employee base could possibly qualify for WOTC. Integrating screening software into an applicant tracking system to quickly identify WOTC eligibility of candidates can be very useful and recommended by experts in the field.

How to Apply for WOTC

The application process involves five steps.

Prior to claiming the tax credit with the IRS, an employer must first request and receive certification from its designated local agency, referred to as the State Workforce Agency (SWA) to which the new hire belongs to. Since the required forms change periodically, ensure that you submit the approved version of the form by checking the IRS’s website for the Work Opportunity Tax Credit.

The top reasons for application denials are a lack of proper documentation and workers being deemed ineligible for the credit, according to the IRS.

Here are the steps that must be taken to qualify for the WOTC:

1. Fill out IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, to prescreen employees, and submit a written request to certify a new hire as a member of a WOTC target group. Job applicants provide this information to the employer or complete the screening information via an automated service on or before the day a job offer is made.
2. Complete ETA Form 9061, the Individual Characteristics Form, which lists the individual characteristics of the worker. Identification documentation may be needed, such as the applicant's driver's license to prove residence, a DD-214 to prove veteran status or a TANF case number.
3. Submit all forms to your state workforce agency within 28 calendar days after the employee's start date. WOTC applications that are not submitted within 28 calendar days may be denied.
4. Receive a determination. The state workforce agency will issue a final determination for each WOTC application. When a certification is received, then the employer can claim the tax credit with the IRS. The time it takes to receive a determination can vary greatly and the average time is between 10 and 12 months. Some states have electronic submission systems and some don't, but the review process itself is still manual, so that takes time.
5. Claim your credit. Generally, an employer elects to take the credit by filing IRS Form 5884, Work Opportunity Credit. However, a tax-exempt organization that hires an employee in the WOTC veteran target group should use IRS Form 5884-C. Remember, employers must wait until eligible employees work at least 120 hours in the first year of employment before filing and qualifying for the tax credit.

Contact Our CPA for Help with Your 2022 WOTC Tax Credit Forms

If you or someone you know is contemplating involvement in the Work Opportunity Tax Credit, Interactive Accountants can assist you in preparing the WOTC tax credit forms with your annual business tax returns.

Give our knowledgeable and experienced business tax professional, Matthew Shiebler, CPA a call at (305) 517-3977 or schedule a free consultation today.