Clarus WOTC Logo

Implications of the Work Opportunity Tax Credit and Labor Market

Virtually all industries that rely on manual labor have experienced significant labor shortage issues. Clarus Solutions’ Brent Johnson discusses how business owners can use the Work Opportunity Tax Credit when hiring new employees.

Although there has been a consistent recovery in the rate of unemployment since the onset of Covid-19, labor participation has not experienced the same success. In fact, there has been a significant decline with workers in low-wage jobs experiencing a huge drop in employment. And a recent report shows that while low-wage workers have had faster wage growth during the past year, wages are still hugely unequal. The accelerated trend of work automation and digitization in certain industries has also contributed to the issue.

Which Industries This Affects

Virtually all industries that rely on manual labor—restaurants, hospitality, staffing, trucking, and retail—have experienced significant labor shortage issues, many resulting from workers being increasingly unwilling to accept relatively low-wages jobs that expose them to the general public. The availability of extended unemployment benefits and other public assistance has made filling these jobs especially difficult.

Many businesses in these industries have successfully leveraged the Paycheck Protection Program (PPP) and Employee Retention Tax Credit (ERTC) to deal with the economic losses stemming from Covid-19. The PPP provided small businesses with funds to pay up to eight weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The ERTC encourages businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by Covid-19.

What Else Business Owners Can Do

The Work Opportunity Tax Credit (WOTC), which was recently extended until 2025, is another employment-based tax incentive that provides a vehicle to deal with the economics associated with the ongoing labor shortage issues created by Covid-19. It is available to employers who hire individuals from certain targeted groups who have consistently faced significant barriers to employment. The targeted groups, also known as “qualifiers,” include:

  • Unemployed or disabled veterans
  • Temporary Assistance for Needy Families (TANF) Recipients
  • Food stamp (SNAP) recipients
  • Residents of empowerment zones or rural renewal counties
  • Vocational rehabilitation referred individuals
  • Re-entering ex-felons
  • Supplemental Security Income recipients
  • Summer youth employees from empowerment zones
  • Qualified long-term unemployment recipients

The goal of this program is to incentivize employers to hire diverse candidates and facilitate access to jobs for American workers. Employers must hire workers prior to 2026.

The potential impact of WOTC is important to mention; businesses that participate will experience a competitive advantage in the industries mentioned earlier that rely on manual labor, while also addressing labor shortages. WOTC also can positively impact mental wellness—for example, with individuals who have faced barriers to employment now being able to work again—as well as local communities by spurring economic growth in those areas.

In addition, many business owners are surprised to learn about some of the larger financial implications and eligibility stemming from WOTC.

  • Twenty percent of new hires potentially qualify for the program.
  • Businesses may see up to 40% cash flow improvement.
  • The average credit per new employee is $2,150.
  • An employee is considered eligible for WOTC once they have hit 120 work hours. Assuming a 40-hour workweek, this will be met in just three weeks’ time.
  • WOTC encourages employee retention. Once an employee hits 400 hours, the maximum credit is usually realized.

Process for Submitting WOTC Paperwork

Once a company determines which targeted group a new employee falls under, the next step is to determine a process to collect their WOTC information. There are two important deadlines that have to be met within a month of a new employee’s first day of work in order to claim the tax credit: The IRS Form 8850 must be completed before or on the day the job offer is made, and either the ETA Form 9061 or ETA Form 9062 must be submitted no later than 28 days after the new hire’s start date.

There is also the ability to screen prospective employees for tax credit eligibility electronically, which makes participation in the program easier and more economically impactful than ever.

Many companies choose to work with tax credit experts, who can manage the process and ensure all deadlines are met.

One Example of a Company Utilizing WOTC

Manpower, a staffing agency in Southeast Michigan, understands the economics of tapping into WOTC and the value of helping people gain meaningful employment through eligibility. The agency first learned about the tax credit when the Hire Act was passed in 2010. More recently, Manpower began working with tax experts who helped them better understand the target groups that would improve eligibility for larger credits. There is no question that the tight labor market has made it especially difficult to recruit, yet Manpower has been able to find workers that have become successful employees by opening their outreach to the WOTC population that they hadn’t specifically targeted in the past.

Refining their recruiting approach has not only resulted in happy customers but has also led to substantial tax savings. This year, 27% of their current workforce hires are eligible for WOTC. Through this tax credit, Manpower has been able to reinvest in their organization by offering more competitive wages and bonuses to reward employees. The company utilizes social media to target eligible workers and has also worked with nonprofits to help WOTC individuals find work.

Manpower’s advice to other companies: As the government continues to revise legislation that provides businesses the opportunity to earn tax credits, then by all means, you should be exploring how to incorporate doing so into your business plan. But ensure you are working with tax credit experts who bring knowledge, transparency, and who truly care about your success and provide the tools necessary to optimize your tax credit potential.

Ultimately, by leveraging this tax credit, your business will increase profits and obtain additional cash flow, so it’s something that all businesses should look into to help address labor shortages.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Brent Johnson is co-founder of Clarus Solutions and is a CPA with an accounting degree from Ohio State University and a master’s degree in tax from Capital University Law School. Over his 25-year career, he has helped businesses claim millions of dollars in employment tax credits.

(SOURCE: Bloomberg Tax)

 

Categories