About $1 billion in tax credits are claimed each year under the Work Opportunity Tax Credit program. Sadly, many restaurant businesses are unaware of the program or simply don’t take advantage of it.
WOTC got started in 1996 by the Small Business Protection Job Act to reduce the federal tax liability of employers who hire from “targeted groups” that commonly face significant obstacles to employment. In return, businesses receive compensation for hiring these workers.
WOTC offsets the costs of hiring a new worker. This should be welcome news for the hospitality industry, where the turnover rate approaches 75 percent and businesses spend $1,200 per employee on training.
Here are five common reasons why businesses miss out on WOTC money.
While there is no limit to the number of new hires employers can claim for WOTC tax credits, businesses often fail to screen new employees to see whether they meet the certification criteria. The remedy is to screen new employees when onboarding new hires to determine WOTC eligibility. Doing so can save you thousands of dollars in tax savings each year.
Short submission window
The federal government requires that WOTC applications be processed within 28 days from the applicant’s hire date. It’s best to identify candidates immediately upon hire to take the swift action needed. An integrated workforce management solution can make it simple and fast to capture all necessary WOTC information and promptly submit the documentation to qualify for the tax credits.
Unsure who qualifies
More than 20 percent of workforce qualifies for WOTC, and you wouldn’t know if you were hiring eligible applicants. Many of the questions to determine eligibility would not come up in an interview. For example, three-quarters of the program's beneficiaries are food-stamp recipients. So, it’s important to have a system in place for new hires to access and complete WOTC qualification. (Note: None of the WOTC qualifying questions violate federal anti-discriminatory regulations. The candidate’s race, religion, gender, and orientation are irrelevant to whether they qualify for WOTC credit. WOTC is a voluntary program.)
Need a tax liability to benefit
It’s a misperception that you must use your WOTC credits immediately or need a tax liability to benefit. Once an eligible applicant is certified, the credit can be applied to estimated quarterly tax payments. You can carry the credit forward up to 20 years, and companies can even keep the credits on their books as an asset in a possible sale.
Don’t understand potential savings
WOTC tax credits can substantially reduce the total amount of money you owe to the IRS. You can claim between $2,400 to $9,600 for each qualifying new hire depending on which target group the employee falls under. The only catch is that your new team member must work a minimum of 120 hours within the first year in their hired role to qualify. After 120 hours worked, you can claim a credit equal to 25 percent of the new hire’s first year of qualified wages. After 400 hours, you can claim a tax credit equal to 40 percent of their first year of wages.
Note: Qualified wages are:
• Wages for which the employer pays the Federal Unemployment Tax Act taxes
• Wages actually paid by the employer, including those to on-the-job training participants.
When looking for a payroll provider, make sure it can screen new hires during onboarding to determine WOTC eligibility and flag candidates, and that it can assist you in completing and submitting applications within the required time frame to secure your tax credits.
Heartland provides entrepreneurs with software-driven technology to manage and grow their business. The company serves more than 400,000 merchants nationwide, delivering trusted solutions for payment, payroll and human resources, point of sale, customer engagement and lending. Heartland is a leading industry advocate of transparency, merchant rights and security. Heartland is a Global Payments Company (NYSE: GPN). Learn more at heartland.us.