The Work Opportunity Tax Credit (WOTC) is a federal income tax credit the encourages businesses to hire individuals who may have a harder time finding employment than others. When an organization hires a person who falls into one of the WOTC's specific target groups, the federal government will reduce the amount of income tax the organization owes on the employee's salary.
"Basically, the federal government has identified these groups and said, 'If you hire someone in one of these categories, we'll give you an income tax credit,'" explains Jason Fry, senior director with Equifax Workforce Solutions.
The WOTC, as great as it is for employers and (certain) employees alike, is not permanent. Every once in a while, it lapses, and the federal government has to reauthorize the legislation and bring the tax credit back to life. One such lapse happened last year, and the as a result, the WOTC was out of commission for 2015. That means a lot of employers missed out on potential tax credits.
Now, however, they can get those credits back, thanks to the Protecting Americans From Tax Hikes (PATH) Act, which was signed into law in December of 2015. The PATH Act not only extends the WOTC through December of 2019, but it also retroactively kicks it back into action for all hires made after January 1, 2015.
What that means is: If you made hires in 2015 that were eligible for the WOTC, you can now claim that credit you didn't get the first time around.
IRS Notice 2016-22: Your Second Chance
"Generally speaking, to qualify for the WOTC, an employer has to ask a certain set of questions on a federal screening form to an applicant or new employee, receive the answers, and forward that document to the state workforce agency to certify the employee's eligibility," Fry explains. "That has to be done within 28 days of the new hire's start date."
Normally, then, it would be too late to claim tax credits for hires made in 2015. We're way past that 28-day filing period.
Enter IRS Notice 2016-22, which provides employers with "transitional relief" by waiving the 28-day filing period. Fry explains:
"Basically, the IRS looks at the time period where the program was in hiatus for 2015 and says, 'Employers may not have been screening since it wasn't active, so they haven't been forwarding claims to the state, so we're giving them transitional relief.' The IRS is letting employers go back and screen people they may not have screened originally who were hired between January 1, 2015, and May 31, 2016. The 28-day time period does not apply to these hires."
Fry also says that, typically, employers have to screen candidates for WOTC qualifications before hiring them. Thanks to IRS Notice 2016-22, however, employers are now free to go back and screen employees who have already been hired.
So here's the major takeaway: Any hires you made between January 1, 2015, and May 31, 2016, can be screened for WOTC eligibility. If any of them are eligible, you can claim the credit – as long as you postmark your certifications requests by June 29, 2016.
"This is a full 17-month period of hiring to look back over," Fry says. "If you weren't screening for the program or missed new hires who were coming in and didn't ask them the questions or screen them, you now have the opportunity to screen those employees, request certification, and claim the tax credit."
Fry says the biggest piece of advice he has for employers in light of this situation is simple: Screen everybody.
"The target groups are wide, and a lot of people may think, 'Oh, I don't hire anyone who would fit into one of those target groups,'" he says. "But in our client base, which spans everything from retail and food service to finance and health care, we've consistently seen between 28 and 33 percent eligibility for all new hires in all industries."
So, even if you think it's not worth it – that you haven't hired anyone who would qualify – you should really go back and double-check. You never know what kind of money you may be leaving on the table.
Who Is Eligible?
As mentioned above, the WOTC extends to employees who are members of certain target groups. These groups include unemployed veterans, food stamp recipients, ex-felons, and a lot of others. (For a full list of target groups, check out the United States Department of Labor website.)
It's important to note that the PATH Act also added a new category to the list of target groups: long-term unemployed individuals. Specifically, this means people who have been unemployed for at least 27 consecutive weeks and who have received some type of unemployment insurance.
However, because this is a new category, only hires made after January 1, 2016 are eligible for it. If you hired someone who fits the bill before January 1, 2016, you can't claim a tax credit on them.
Fry also notes that employers should be aware that there is a retention period.
"In order to be eligible, an employee has to work at least 120 hours," he explains. "There is also a separate milestone for employees who work 400+ hours or more."
In other words: The longer an employee sticks around, the bigger the tax credit you can get.
As if you needed another reason to boost your retention efforts, right?