The Work Opportunity Tax Credit (WOTC) is kind of a big deal. About $1 billion in tax credits are claimed each year, according to the Department of Labor. The program is available to all employers, but many companies miss out on available credits. Missing out especially applies to companies with an hourly workforce. Read on to see what you may be missing.
WOTC is part of the United States Internal Revenue Code. It encourages employers to hire and retain individuals from certain groups that have consistently faced significant employment barriers. Employers can claim a tax credit based on wages paid to those individuals.
The amount of the WOTC is a percentage of wages paid to an eligible employee during their first year of employment, up to a statutory limit. However, the employee must work at least 120 hours during the first year of employment to qualify for any credit. Here are the basic thresholds:
Hours Worked During the First Year / Credit % of Wages Up to Statutory Limit
Up to 120 Hours / 0%
120 Hours and up to 400 Hours / 25%
400 Hours or More / 40%
The statutory limit of wages that are WOTC-eligible varies by the characteristics of the worker. The most common wage ceiling is $6,000 (for a maximum credit of $2,400), though some subpopulations are eligible for a higher or lower maximum.
Pretty complicated, isn't it? Of course. It's similar to every other section of our tortuous tax code. WOTC gets even more complex because State employment commissions administer the federal program. The states get involved to verify that new hires are, in fact, members of WOTC groups. They notify the employers as to whether they are allowed to claim the tax credit. If you participate in this program, you will need help from professionals who work through these issues every day.
Many WOTC-eligible candidates apply for hourly jobs. Annual employee turnover among the hourly workforce can be quite high. High double-digit percentage and even triple-digit percentage turnover rates are not unusual. Accordingly, the chance of a new employee working 400 hours in the first year is difficult to predict.
For some companies, the WOTC process just sort of happens. They're aware that the program exists; they collect the applicants' data and file paperwork with the appropriate state. Fingers remained crossed, and they hope for their share of that $1 billion credit. There is a better way!
But first, let's dive into how this works. Let's assume your hourly employees work an average of 30 hours per week, and you pay them $15 per hour. To qualify for any WOTC credit, a new employee must work about one month to reach the first threshold. At one month (120 hours), your company may earn the 25% credit, which in this example is $450. If the employee works just over three months (400 hours), your company can earn a full 40% credit of $2,400. Think about that carefully. During those two months, your tax credit could increase by $1,950 per employee. How much money are you forfeiting because your employees are quitting between month one and month 3? How much are you losing because the new employee doesn't even last one month? Based on the data we collect and analyze at Cadient Talent, it's a lot. For companies hiring thousands of people every year, that could be millions of dollars. That makes WOTC a huge deal!
You may be thinking, "Thanks for the economics lesson, professor, but there's nothing I can do about it." Fortunately, you're wrong about that. The critical component, not just in WOTC but in all aspects of your workforce, is being able to analyze all applicants and reliably predict which ones will stay on the job longer and become great employees. WOTC credit is nice, but the real objective is to hire people who will be productive and provide a great customer experience over a long period.
So, how do we accomplish this? We need to change the hiring process. What happens today when you receive 100 applications to fill one hourly position? Will the hiring manager review all 100 applications? Not likely. They will look at a few, maybe 10, and make a hire based on that subset of applications. But what about the other 90 applicants? Buried in the stack may be the best candidate you've ever seen. That great candidate may be WOTC-eligible. How do you find that applicant?
Today's hiring solutions must have a decision support system powered by machine learning and augmented intelligence. Without it, you will never optimize your talent acquisition system to find the best applicants. A machine learning algorithm can analyze those 100 applications in seconds and make recommendations as to which applicants will make the best employees and which WOTC-eligible candidates will actually stay on the job long enough to capture the entire tax credit.
However, don't be fooled by machine learning systems that simply try to replicate the recruiting decisions your hiring managers currently make. Such systems are trained to hire the way your managers have previously hired. What good is it to continue to make bad hires but do it more quickly and continue to forfeit your WOTC potential?
You need machine learning algorithms that will evaluate applicants against your best-performing employees' characteristics and traits. Both pre-hire applicant data and post-hire employee data is required to make the best decision. With this type of full-cycle system, your hiring manager can look at only the best applicants for your particular business model. Out of those recommended candidates, people hired will be great employees and feel a sense of satisfaction and fulfillment in their job.
The whole point of WOTC is to encourage employers to hire individuals who face significant barriers to employment and are often shut out of the job market. The employee gets a job, and you, the employer, receive a tax credit. To maximize your tax credit, your eligible employees must stay on the job for a year and work a certain number of hours. The goal is not only to hire eligible employees but to keep them employed. The hourly workforce tends to see high turnover. A talent acquisition solution with machine learning can help you identify employees who are likely to stay on the job longer and make your business stronger. Their longevity comes with the added benefit of maximizing your tax credit.
At Cadient Talent, we offer a recruiting solution for employers with large hourly workforces. We have supported large companies with distributed hourly workforces for over fifteen years. We evaluate every aspect of our clients' talent acquisition process to help improve their quality of hire. When you hire a WOTC-eligible applicant, we can help you predict which ones will stay on the job and be great employees.
Learn more about how you can improve your recruiting process to increase profits and achieve better business results by making more quality hires. Visit us at BetterHiresMadeSimple.com.