Does your company employ veterans who’ve served our country? Does it give individuals who’ve experienced long-term unemployment the chance to work again? Do you hire low-wage workers or persons living with disabilities?
By not asking themselves these questions, many financial leaders at small and medium-size companies miss out on tens of thousands in federal tax credits every year.
The Work Opportunity Tax Credit (WOTC) incentivizes inclusionary employment policies by granting tax credits to companies that hire targeted workers. Companies claim roughly $1 billion annually via WOTC, and there’s no cap on how many employees can qualify for the credit. But many smaller businesses don’t realize that WOTC credits can cover about 47% of recruiting, hiring, and training expenses for certain employees.
The program’s benefits are administered via a tiered system according to how many hours an employee works. If a qualifying hire works more than 400 hours, her employer can claim 40 percent of her first-year wages up to the maximum per-employee credit of $2,400 — and up to $9,600 if the individual is a veteran. These credits add up, translating to tens or hundreds of thousands in annual savings.
If you’re wondering why you’ve never heard about the WOTC, you’re not alone. Many CPAs aren’t even aware of the program, so they have no idea how much money it could be saving their clients. But if you’re not taking advantage of the WOTC in your current and future hires, you’re leaving serious money on the table.
The first question many CFOs ask about the WOTC is, “Why is the federal government giving away money?” To put it simply, the government wants to get more people into jobs.
The WOTC applies to groups who struggle to find work for a range of reasons. By offering generous credits, the government encourages employers to hire from all segments of the labor market, helping to create self-sufficient taxpayers.
WOTC has been so successful that the U.S. Congress recently broadened it via the Protecting Americans From Tax Hikes (PATH) Act, retroactively reauthorizing the WOTC to cover a lapsed year and expanding its target groups to include the long-term unemployed.
The program is a win all around. It creates job opportunities for workers, reduces business’s tax liabilities and overall hiring costs, and decreases an individual’s dependence on direct government aid.
If you hire individuals belonging to any of the following groups, your business may be passing up thousands in WOTC credits:
1. Low-wage workers: A whopping 35 million Americans earn less than $10.55 per hour, three quarters of whom are 20 years of age or older. Low-income households struggle to afford basic necessities, and the WOTC gives employers incentives to help them do so. WOTC-eligible low-wage workers include many individuals who’ve received Temporary Assistance For Needy Families and individuals who’ve received Supplemental Nutrition Assistance Program (SNAP) benefits in the last six months.
2. Veterans: The veteran unemployment rate recently hit an eight-year low at just 3.9% in October 2015, in part thanks to the WOTC. That’s because businesses that hire veterans stand to earn tax credits ranging from $2,400 to $9,600 per qualified employee. The WOTC applies to veterans who’ve recently received SNAP benefits or food stamps; those who were unemployed at least four weeks before they were hired; and those who receive compensation for service-related disabilities.
3. Ex-felons: Men with criminal records account for about 34% of all nonworking men aged 25 to 34, and studies show 60% to 75% of ex-offenders are jobless a year after release. Employment, however, is a great defense against recidivism, and companies that hire felons can apply for WOTC credits to mitigate the risks of such a hiring policy. Qualifying individuals must have been convicted or released from prison within a year of being hired.
4. People living with disabilities: People living with disabilities face an especially tough climb to gainful employment, with just 17.1% employed, according to the Bureau of Labor Statistics’ most recent data. For this reason, the WOTC targets persons living with disabilities, such as vocational rehabilitation referrals. These individuals must be completing or have completed rehabilitation treatment from a state-certified agency through the Ticket to Work program or via the Department of Veterans Affairs. Others may qualify based on their receipt of supplemental security income benefits during the two-month period prior to employment.
Your business can begin raking in WOTC credits by consulting its payroll provider or third-party facilitator, such as National Tax Credit or Walton Management Services. These companies specialize in WOTC screenings via pre-employment questionnaires and HR consultations.
Most businesses that claim WOTC credits work with third-party providers because of the program’s complex, time-consuming application process. For instance, employers that go it alone must fill out the first page of IRS Form 8850 prior to making a job offer and the second page after the hire date. Then they must submit these forms to the Department of Labor for certification within 28 days of an employee’s start date. Once an individual is certified as WOTC eligible, the employer must track that employee’s hours to calculate the tax credit accurately.
The WOTC is the best-kept secret in business finance, and it’s time for it to see the light. Consider WOTC in your hiring strategies so you can stop leaving money on the table and claim tax credits that are rightfully yours.
Benjamin Geyerhahn is founder and CEO of BeneStream. A recognized leader at the convergence of health care and social impact business, Ben is also a member of the Advisory Board of Maxwell Health and a contributor to Forbes and Skoll World Forum.