Eliminating Confusion over Work Opportunity Tax Credit Program Can Help Drive Progress

Michael Bonarti, Chief Administrative Officer at ADP

As the world of work continues to evolve and talent demands shift, it’s critical that today’s employers have a clear understanding of the programs available to help them recruit relevant candidates and provide opportunity. One such program is the Work Opportunity Tax Credit (WOTC) program, which incentivizes companies to hire veterans and other individuals who have traditionally faced obstacles to employment. When used properly, the program can help boost employment in key groups and nurture diversity, equity and inclusion across organizations.

To realize the program’s full value, it is essential to understand how WOTC works and eliminate confusion surrounding a core element of the program: precisely when an employer must screen a job applicant for qualifying WOTC factors in relation to when the employer makes an offer of employment. As the result of this confusion, employers may be making hiring decisions before learning whether applicants might meet WOTC requirements, reducing the intended impact of the program.

Understanding the Work Opportunity Tax Credit

The WOTC program is a federal tax credit that incentivizes employers to hire and retain qualified veterans and other individuals from target groups that historically have faced barriers in securing employment. Specifically, the WOTC program provides employers with a tax credit when they hire qualified job applicants from the following targeted groups: veterans; people formerly incarcerated or those previously convicted of a felony; vocational rehabilitation referrals; summer youth program participants; and recipients of Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI), or long-term unemployment benefits, among others.

The IRS’s recent update in September 2022 provides information on the pre-screening and certification process, advising that to satisfy the requirement, a pre-screening notice must be completed by the job applicant and the employer. Referencing the program’s intent, the update states, “In enacting WOTC to replace the Targeted Jobs Tax Credit (TJTC) in 1996, Congress included the requirement that employers pre-screen job applications before or on the same day the job offer is made. In doing so, Congress emphasized that the WOTC is designed to incentivize the hiring and employment of certain categories of workers.” In 2021, Congress authorized the extension of WOTC until December 31, 2025.

Navigating the Point of Confusion

The IRS’ latest update reaffirms the basic WOTC intent, that an employer’s hiring decision should take into account the applicant’s WOTC eligibility by screening for such eligibility “on or before the date a job offer is made.” Thus, for the decision to be truly influenced by WOTC, screening must occur before any type of offer is made.

However, there are varying opinions surrounding what specifically constitutes an offer of employment, which might diminish the intent of the WOTC program. Some employers perform the screening of all applicants prior to making any type of job offer, while others perform the screening once the requirements of a contingent offer or conditional offer have been met. The problem with the latter is that the employment decision has been made without consideration of WOTC factors, collecting that information only after the job offer is accepted. This practice undermines the intent of the WOTC program, which is to give qualified applicants an advantage if they are in one of the targeted groups.

The concern is that the WOTC program is not fulfilling the intent to incentivize employers to hire applicants within the targeted groups, resulting in (i) employers who hire eligible workers without knowing their status receiving a windfall not intended by WOTC, and (ii) available and eligible workers within targeted groups not being hired at all. When employers only screen applicants to whom they have already extended a job offer, those disadvantaged applicants whom the WOTC program is intended to benefit lose out. 

Clarification to Help Drive Progress

While the IRS’ September 2022 update was a helpful reminder regarding the requisite timing elements of the WOTC screening and offer of employment process, we believe further clarification is needed to define what constitutes an “offer” of employment and whether a conditional or contingent offer of employment triggers the screening requirement, so all providers can administer the program in a uniform fashion. Ultimately, the goal is to help employers leverage the program to identify job candidates from the groups WOTC is designed to help. Clarification on what constitutes an offer of employment (i.e., formal written offer, verbal offer, conditional or contingent offer) would eliminate any confusion.

From an applicant process standpoint, candidates would need to complete the screening paperwork during the application process, before or at least on the day of any job offer. This would help ensure that the employer is aware of whether the applicant meets the qualifications of one of the targeted groups identified by WOTC prior to an offer being made. Asking for this information after a job offer has been made or even later in the hiring or onboarding process negates the purpose of the program.

The impact of WOTC is meaningful: it has historically provided more than $1 billion in tax credits for hiring an average of roughly two million eligible employees each year over the past five years. The Congressional intent of WOTC is clear: to incentivize hiring of specified disadvantaged groups, and not simply offer credits to any employer who happened to hire a worker in those job categories. To be effective, WOTC screening cannot be done after an employer has already decided to extend a job offer.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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