What is the WOTC, and how can I utilize it?
By Charles Cannon
Past research has suggested that the hospitality industry is burdened with one of the highest turnover rates in America, especially in non-management roles. One of the features of President Obama’s PATH Act, signed in December 2015, was written to help alleviate the cost of hiring and training new employees.
What is WOTC?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit created by the Small Business Job Protection Act of 1996 and the Welfare-to-Work Tax Credit of 1996. This credit is available to employers who hire and retain from target groups. Employers claim about $1 billion in tax credits each year under the WOTC program. There is no limit on the number of individuals an employer can hire to qualify to claim the tax credit, and there are a few simple steps to follow to apply for WOTC.
What Types of Employees Qualify?
From the 1940s through the 1990s: Although many of these programs started out as programs specifically designed for veterans, they were expanded in the 80s and 90s to include broader groups such as TANF recipients, SNAP (food stamp) recipients, residents living in empowerment zones or rural renewal counties, employees receiving certain types of vocation training, ex-felons, supplemental security income recipients, summer youth employees and seasonal workers.
Into the 2000s
The financial meltdown in the mid-2000s brought about a renewed focus on job creation. With this we saw massive expansion of federal tax incentives for creating and maintaining jobs. This was done through the Small Business Jobs Act, The American Recovery and Reinvestment Act, numerous job creation and protection acts, and most notably, the PATH Act signed by President Obama for effective changes in 2016 through 2022.
The pattern in the last decade is that with the passing of each act, especially with the PATH Act update, more and more companies are eligible for WOTC. Hospitality, in particular, is an industry that will have a high percentage of its employees able to qualify.
How are they Calculated?
Employers, for WOTC eligible candidates, generally can earn a tax credit equal to 25 percent or 40 percent of a new employee’s first-year wages, up to the maximum for the target group to which the employee belongs. Employers will earn 25 percent if the employee works at least 120 hours and 40 percent if the employee works at least 400 hours. The average benefit per employee
is $2,400.
How is the Credit Claimed?
WOTC is a general business credit and can offset federal income taxes and can be carried back to the prior year or carried forward 20 years.
Taxable Employers
After an employee has been qualified and the certification secured, a taxable employer may claim the tax credit as a general business credit against its income tax using IRS form 3800.
Sole Proprietorship, S-Corp, LLC, LLP or Partnership
The credit passes to the owner, shareholder, member or partner in the same manner as losses are allocated.
C-Corp
The credits are used by the corporation.
Why Haven’t I Heard of this Previously?
WOTC requires an administrator to qualify for benefits. Historically, this has been an onerous “pen on paper” process. Documents needed to go from hiring manager to prospective employee, back to hiring manager, to HR, to the administrator then to the state. All before an employee began work. This lead to a broken model, which had up to seven failure points. Unlike many tax credits, where a taxpayer can often go back, there is no second chance in WOTC.
Once an employee has begun work, you have lost any credit you were entitled to. Additionally, because the administrator had manual work in the process, the fees have historically been high, leading to companies receiving a low ROI in the process. In practice, most of these credits have been paid out to large corporations, which typically have the manpower on staff to internally administer the process.
Today, it is possible to find fully automated systems, which can coordinate with your internal candidate tracking systems, allowing pre-qualification in the employee-selection process.
Imagine you have three candidates for one position. All other things being equal, candidate 1 carries no credit, candidate 2 carries a $2,400 credit and candidate 3 carries a $9,600 credit. Who would you hire? ■
Charles Cannon is a 20-year veteran in financial services. Cannon Financial Group works with employers throughout the country implementing specialized tax and savings programs. He specializes in solving the needs of owners in the hospitality industry. Cannon lives with his wife and two children in Portland, Oregon, where he is an active member of the AAHOA Northwest Region. For more information on what programs your company may be eligible for, visit www.cannonfg.com.
