Everything you need to know about the Work Opportunity Tax Credit
May 3, 2018
By Natalie B. Hoffmann, CPA.CITP HKP President
- Veteran (food stamps) – up to $2,400 for a member of a family receiving assistance under a food stamp program under the Food Stamp Act of 1977 for at least a 3-month period ending during the 12-month period ending on the hiring date.
- Veteran (unemployed at least 4 weeks) – up to $2,400 for having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 4 weeks (but less than 6 months).
- Veteran (unemployed 6 months) – up to $5,600 for having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 6 months.
- Veteran (disabled) – up to $4,800 if the veteran is entitled to compensation for a service-connected disability, and having a hiring date which is not more than 1 year after having been discharged or released from active duty in the Armed Forces of the United States.
- Veteran (disabled and unemployed 6 months) – up to $9,600 if the veteran is entitled to compensation for a service-connected disability and having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 6 months.
- TANF recipient – up to $2,400 for a member of a family receiving TANF assistance for any 9 months during the 18-month period ending on the hiring date.
- Long-term TANF recipient – up to $9,000 (over two years – $4,000 in the first year and $5,000 in the second, calculated as 40% of first year wages and 50% of second year wages, with a wage cap of $10,000 in each) for a member of a family receiving assistance under a TANF program for at least the 18-month period ending on the hiring date, receiving such assistance for 18 months, and having a hiring date which is not more than 2 years after the end of the earliest such 18-month period, or being a member of a family which ceased to be eligible for such assistance by reason of any limitation imposed by Federal or State law on the maximum period such assistance is payable to a family, and having a hiring date which is not more than 2 years after the date of such cessation.
- Ex-Felon – up to $2,400 for having been convicted of a felony under any statute of the United States or any State, and having a hiring date which is not more than 1 year after the last date on which such individual was convicted or was released from prison.
- Designated Community Residents – up to $2,400 for having attained age 18 but not age 40 on the hiring date, and as having his or her principal place of abode within an empowerment zone, enterprise community, renewal community, or rural renewal county.
- Vocational Rehabilitation Referral – up to $2,400 for having a physical or mental disability which constitutes or results in a substantial handicap to employment, and having been referred to the employer upon completion of (or while receiving) rehabilitative services pursuant to an individualized written plan for employment under a State plan for vocational rehabilitation services, a program of vocational rehabilitation, or an individual work plan developed and implemented by an employment network.
- Summer Youth Employee – up to $1,200 for an individual who performs services for the employer between May 1 and September 15 between the age of 16-18 on the hiring date, who has not been an employee of the employer during the 90-days previous to hire, and having his principal place of abode within an empowerment zone, enterprise community, or renewal community.
- Supplemental Nutrition Assistance Program (SNAP) Benefits Recipient – up to $2,400 for an individual between age 18 and 40 on the hiring date, and being a member of a family receiving assistance under SNAP for the 6-month period ending on the hiring date, or receiving such assistance for at least 3 months of the 5-month period ending on the hiring date, in the case of a member of a family who ceases to be eligible for such assistance.
- SSI Recipient – up to $2,400 for an individual receiving supplemental security income benefits for any month ending within the 60-day period ending on the hiring date.
- Long-Term Unemployment Recipient – up to $2,400 for an individual in a period of unemployment which is not less than 27 consecutive weeks, and includes a period in which the individual was receiving unemployment compensation under State or Federal law.
- The Taxpayer Relief Act of 1997 extended its original 12 month term an additional 9 months
- The Tax and Trade Relief Act of 1998 reauthorized and extended it 12 months
- The Ticket to Work and Work Incentives Improvement Act of 1999 extended WOTC for an additional 20 months
- The Job Creation and Worker Assistance Act of 2002 retroactively reauthorized it to the beginning of the year and extended it for a total of 24 months
- The Working Families Relief Act of 2004 retroactively extended WOTC to the beginning of the year and through 2005
- The Tax Relief and Health Care Act of 2006 retroactively extended it again to the beginning of 2006 and through 2007
- The Small Business and Work Opportunity Tax Act of 2007 extended WOTC for 44 months
- The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act extended it 4 months through the end of 2011
- The American Taxpayer Relief Act of 2012 retroactively extended WOTC to the beginning of 2012 and through 2013
- The Tax Increase Prevention Act of 2014 retroactively extended it to the beginning of the year and through the end of 2014
- The Protecting Americans from Tax Hikes Act of 2015 retroactively extended WOTC to the beginning of 2015 and through 2019
- Hires in the veteran target groups increased by 81% between 2014 and 2015, going from 69,057 to 125,302.
- The average job tenure for a WOTC hire is 2.3 years.
- Because two thirds of those applying for jobs already have one, hiring WOTC individuals actually expands the workforce.
- WOTC is one of the most cost effective hiring programs ever enacted by the U.S. Government.
Since its inception in 1996, the Work Opportunity Tax Credit (WOTC) has helped millions of Americans find jobs and given businesses over $1 billion in tax savings, all while reducing the burden on government entitlement programs and saving U.S. taxpayers billions of dollars in the process.
How WOTC Works
When new employees are hired by a business, they voluntarily fill out IRS Form 8850 and Department of Labor (DOL) Employment and Training Administration (ETA) Form 9061, answering various questions about their background, individual characteristics, and employment history. Within 28 days of hire, the forms must be submitted to a State Workforce Agency (SWA), which evaluates the applications, determines whether the applicant falls into one or more designated target groups, and then certifies or denies the application. In recent years, the forms, application submissions, and certifications have transitioned into the electronic realm, making the process smooth and paperless for many businesses.
If a certification is issued, the amount of credit available depends on the number of hours worked, the amount of qualified wages earned, and the qualified wages cap for the target group under which the new hire qualifies. No credit is allowed for an employee who works less than 120 hours. For an employee who works between 120-400 hours, the amount of credit is 25% of first year wages up to a ceiling determined by the target group. For an employee who works over 400 hours, the credit is 40% of first year wages up to the amount determined by the target group. For example, the qualified Temporary Assistance for Needy Families (TANF) recipient target group has a qualified first-year wages cap of $6,000. Therefore, the maximum credit is $6,000 multiplied by 40 percent, or $2,400.
The WOTC target groups, basic qualifications, and maximum credit amounts are as follows:
WOTC is claimed as a General Business Credit under IRC Section 38 and on IRS Forms 5884 and 3800. For assistance administering and claiming WOTC, businesses should consult a tax professional.
The History of WOTC
Since its creation in 1996 by the Small Business Job Protection Act, WOTC has expired and been renewed eleven times:
SWAs issued over 12 million WOTC certifications during that time. This represents over $1 billion in tax credits taken by U.S. businesses, and millions of historically underemployed Americans put back to work. The categories of individuals who qualify for WOTC were chosen because they are historically underemployed segments of the population and may experience undue prejudice when applying for work. However, even though these individuals may have an undeserved negative stigma attached to them, most are grateful for the opportunity to get off public assistance and tend to have very high loyalty to the business that gave them a chance.
SWAs administering WOTC continued to exist throughout its history, but didn’t process during hiatus periods, leading to onerous and enormous backlogs in some cases. Even with electronic filing now prevalent and over two-thirds of states having electronic systems, the effects of these backlogs are still felt by many SWAs. Now that WOTC is authorized through 2019 and many of the remaining states transition to electronic systems, lengthy turnaround times will eventually become a thing of the past.
Another important thing to note throughout WOTC’s history is the ever evolving list of target groups. Because WOTC has a long-established framework of SWAs in all 50 states, adding to the list in order to achieve higher employment rates in certain populations is relatively simple and effective compared to starting entirely new government programs.
The original WOTC target groups of economically disadvantaged youth, economically disadvantaged Vietnam-era veteran, vocational rehabilitation referral, SSI recipient, general assistance recipient, economically disadvantaged ex-convict, eligible work incentive employee, involuntary terminated CETA employee, youth participating in a cooperative education program, and qualified summer youth employee have been tweaked over the years, of course. Some still remain in place, some were modified to work with other legislation, and some expired and no longer exist. What’s important to note is the each modification happened in response to changing needs within the country’s employment landscape, and occurred smoothly within WOTC’s existing framework.
Notable additions and changes over time include: empowerment zones, enterprise communities, and renewal communities; hurricane Katrina employees; TANF (food stamp recipients); long-term TANF; various veteran categories including differing levels of unemployment and disability; high-risk youth; and the long-term unemployed. The ability to add, subtract, and tweak target groups for an endless variety of scenarios from urban and rural renewal, to economic downturns, to natural disaster assistance and relief displays WOTC’s flexibility and durability over the last twenty years.
To this day, legislators still come up with ideas to use WOTC’s flexibility as a policy tool, and potential future additions include target groups for foster youth, at-risk youth, members of the National Guard, student loan recipients, and the unemployed who lost their jobs due to companies moving overseas.
The Value and Benefits of WOTC
According to studies by Dr. Peter Cappelli of The Wharton School at the University of Pennsylvania, the total government savings from WOTC for TANF, SNAP, Medicaid, and federal housing subsidies is around $17,700 per certification. The savings for SSI recipients and veterans are higher still. For WOTC’s newest target group, Long-Term Unemployment Recipients, Dr. Cappelli estimates the federal savings in terms of federal benefits that would not need to be paid are close to $28,000 per individual over three years.
Using 2015 certification numbers, WOTC saves state and federal governments approximately $188 billion in entitlement program spending over 10 years. Yearly savings for the federal government in SNAP, TANF, Medicaid, and public housing payments is estimated at $7,600 per employee. Multiplied by the 1.9 million certifications issued in 2015, this results in $14.4 billion in savings every year. Approximately $4 billion per year is also saved at the state level in these programs. If WOTC were to disappear, every state would be on the hook for a significant amount of additional entitlement spending every year. Here’s a state-by-state breakdown:
|State||Estimated Annual WOTC State Savings||DOL FY 2015 Certifications||FY 2015 Pending Certifications|
|District of Columbia||$7,520,329||2,305||6,346|
Other important statistics include:
The Future of WOTC
After WOTC’s renewal through 2019, state agencies and businesses felt an air of certainty for the first time in years. Plans for tax returns, hiring practices, and consistent workloads seemed assured. However, with the election of Donald Trump and Republican majorities in Congress pushing for tax reform, WOTC’s future is up in the air again.
With Rep. Kevin Brady (R-TX) leading the Ways and Means Committee, they will deal with tax credits and extenders such as WOTC in the process of crafting reform. Although Chairman Brady suggested he wants to axe many tax expenditures, the good news is that WOTC well positioned compared to other programs for a shot at permanent inclusion in the tax code.
Recently, the Ways and Means Committee held a tax reform retreat to go over general prospects for legislation. Although not too many details were discussed, WOTC does maintain strong support from several committee members.
Tax reform could take several paths at this point, so it is important for WOTC’s supporters to remain vigilant and flexible to the changing environment. If broad consensus is reached for wide-reaching, revenue neutral, and permanent reform, the goal is obviously to get WOTC included for the long-haul. However, if something less than full reform occurs, WOTC should at least remain intact through its current expiration date at the end of 2019. No one knows exactly what will happen, but for now, the House is holding meetings on tax matters and the Senate is holding off.
WOTC is also consistent with President Trump’s anti-poverty, pro-work agenda. It would not be easy to replace with new, untested policy tools. Its continuation ensures both federal and state governments keep spending at much lower rates than they would otherwise.
Additionally, with the Trump administration’s budget being released, focus at least partially shifts to convince them that WOTC is worth keeping – that it plays a critical role in promoting the goal of tax reform, getting high-risk Americans to work, and reducing welfare costs. While details of the budget in this respect are few as far as which tax items they want to keep and what they want to discard, they should be open to hearing the cases for each.
As is evident from the statistics, WOTC isn’t just a tax break – it’s a highly effective means of reducing government dependence and spending overall on both the federal and state level while putting high risk individuals back to work. Educating Congress is the key to getting WOTC solidified as a permanent part of the tax code. Once members learn about the details, support is almost universal.
The fact that WOTC is such a flexible policy tool, a cost effective hiring program, and has an extremely low fraud rate only adds to the argument. Not including WOTC as a permanent part of tax reform would result in a multitude of problems for American workers, American businesses, and higher government spending. The benefits far outweigh the costs for both state and federal governments, reduces poverty, and expands the workforce while increasing private sector employment. There are no other tools like WOTC that have such huge benefits and low drawbacks.
Originally published on wikinut.com, July 11, 2017.