Integrating the Work Opportunity Tax Credit into client tax return preparation for your CPA practice can add to the strength of your client relationships by helping optimize a client’s cash flow and expanding your understanding of the client’s business.
WOTC is a voluntary federal tax credit program designed to encourage businesses to hire individuals who fall into one of numerous target groups that typically experience significant barriers to employment. These include military veterans, disadvantaged workers within the federal poverty level, the disabled, long-term unemployment recipients, and teens from Empowerment Zones for summer employment.
An organization can hire as many WOTC eligible individuals as it likes. There is no limit to the number of tax credits for which a business can apply. WOTC can translate into significant tax credits for businesses, with tax credits ranging between $1,200 and $9,600 per employee, depending on the target group and the number of hours worked in the first year. Employees must work at least 120 hours in the first year of employment for businesses to receive the tax credit.
There is flexibility in how the tax credits are applied. They can be applied quarterly and annually against income tax liability. Unused credits can be carried forward 20 years, or carried back one year, depending on a client’s situation. They also can help offset any Alternative Minimum Tax.
The WOTC process is relatively straightforward. Job applicants must fall within a target group recognized as eligible for WOTC. Potential screening methods to determine eligibility include use of paper forms, online platforms, or on the phone with the job applicant’s participation.
Within 28 days of the employee’s start date, businesses must submit this WOTC information to their local state workforce agency, or SWA, using IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit. Businesses also should complete and submit ETA Form 9061 or ETA Form 9062 if the employee has been conditionally certified as falling into a WOTC target group by the SWA, Vocational Rehabilitation Agency or another participating agency.
The final determination from the SWA will indicate whether the employee is certified as meeting the eligibility for one of the WOTC target groups. Upon certification, the tax credit using Form 5884 and Form 3800 may be filed with the IRS.
If your clients ask you to submit the WOTC request for certification on their behalf, you will need to complete IRS Form 2848, Power of Attorney and Declaration of Representative. The signed form must be submitted to the SWA.
The processing time to have a request for certification approved by a SWA can range from less than six months to more than 18 months, depending on the state in which you are applying. The most recently available statistics indicate the states with the fastest processing times are Alabama, Colorado, Florida, Georgia, Illinois, Kentucky, Louisiana, Massachusetts, New Jersey, New York, Ohio, Oregon, South Dakota, Tennessee, Texas, Vermont, Virginia and Washington. States with the longest lead times are Alaska, Connecticut, Maine, Montana, Nevada, Rhode Island, Oregon, Vermont, West Virginia, Wisconsin and Wyoming.
Often, businesses contract with third-party providers to handle the WOTC process. If you or a client decides working with a third-party provider makes sense, here are some things to consider when looking for expert assistance:
• What screening methods will the third-party provider use? Most will offer a combination of paper filing, WOTC call center and online solutions. Call center operations tend to offer much higher qualifying ratios than other methods.
• What metrics will they use to measure success? How and how often will they report on these metrics?
• What expertise do they have in communicating with SWAs?
• Do they use e-sign technology to make it easier for employees to provide information, thus maximizing participation?
Becoming a successful WOTC practitioner is a win-win situation. It’s a win for your community because you encourage clients to employ individuals who are under economic duress or are finding it difficult to gain meaningful employment. It’s a win for your clients because they have received positive credit in the community while generating considerable tax savings and improved cash flow. And it’s a win for you by strengthening your relationships with your clients through gaining further understanding of your clients’ businesses, adding value to your clients by lowering their federal tax liability, and potentially using their WOTC data to identify other state and local tax incentives.