About $1 billion in tax credits are claimed each year under the Work Opportunity Tax Credit (WOTC) program. Sadly, many restaurants and lodging businesses are unaware of the program or simply don’t take advantage of it.
WOTC was founded in 1996 by the Small Business Protection Job Act to reduce the federal tax liability of employers who hire from “targeted groups” that commonly face significant obstacles to employment. Examples of target groups include qualified veterans, ex-felons, designed community residents (DCR) and qualified long-term unemployment recipients, a recent addition. In turn, this measure for greater workplace diversity and inclusion incentivizes businesses through compensation for making these hires. (Source)
WOTC offsets the costs of hiring a new worker. This should be welcome news for the hospitality industry, where the turnover rate approaches 75 percent and businesses spend $1,200 per employee on training.
Here are five common reasons why businesses miss out on WOTC funds.
1. Failure to screen applicants
While there is no limit to the number of new hires employers can claim for WOTC tax credits, businesses often fail to screen new employees to see whether they meet the certification criteria. The remedy is to screen new employees when onboarding new hires to determine WOTC eligibility. Doing so can save you thousands of dollars in taxes each year.
2. Short submission window
The federal government requires that WOTC applications be processed within 28 days from the applicant’s hire date. Thus, it’s important to identify candidates immediately upon being hired to take the swift action needed. An integrated workforce management solution can make it simple and fast to capture all necessary WOTC information and promptly submit the documentation to qualify for the tax credits.
However, there is one temporary exception to this rule. The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) allows eligible employers to retroactively claim the WOTC for all targeted group employees for anyone who began work after December 31, 2014 and before January 1, 2021. (Source)
3. Unsure who qualifies
Over 20 percent of the workforce qualifies for WOTC, and you wouldn’t know if you were hiring eligible applicants because many of the questions to determine eligibility wouldn’t come up in an interview. For instance, three-quarters of the program's beneficiaries are food stamp recipients. It’s important to have a system in place for new hires to access and complete WOTC qualification.
4. Tax liability confusion
It’s a misperception that you must use your WOTC credits immediately or that you need a tax liability to benefit. Once an eligible applicant is certified, the credit can be applied to estimated quarterly tax payments. You can carry the credit forward up to 20 years, and keep the credits on your books as an asset in a possible sale.
5. Unaware of potential savings
WOTC tax credits can substantially reduce the total amount of money you owe to the IRS. You can claim between $2,400 to $9,600 for each qualifying new hire depending on which target group the employee falls under. The only catch is that your new team member must work a minimum of 120 hours within the first year in their hired role to qualify. After 120 worked hours, you can claim a credit equal to 25 percent of the new hire’s first year of qualified wages. After 400 hours, a tax credit equal to 40 percent of their first year of wages can be claimed.
CARES Act employee retention credit
In response to the pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law on March 27, 2020. Eligible employers (experienced a full or partial suspension during the calendar year) and/or experienced a significant reduction of gross receipts due to sheltering-in-place, stay-at-home or similar public health measures, certain employment taxes may be deferred if the employer continues to pay the employee for services unable to be rendered during the period. If you haven’t claimed WOTC for an employee during the same period, you can claim the credit.
When looking for a payroll provider, make sure they have the ability to screen new hires during onboarding to determine WOTC eligibility and flag candidates, and that they can assist you in completing and submitting applications within the required timeframe to secure your tax credits. (Source)