What is WOTC Optimization and How Can Employers Maximize Their Tax Credits?
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from certain target groups who have consistently faced significant barriers to employment. While many businesses may be aware of WOTC, optimizing this program to maximize benefits is often overlooked. Here’s a comprehensive guide to WOTC optimization and the key components involved.
**1. Number of New Hires**
WOTC optimization begins with understanding the number of new W2 employees an employer hires annually. Since contractors and 1099 employees are not eligible for tax credits, focusing on new W2 hires helps determine the overall potential of the program. The more new W2 employees hired each year, the greater the opportunity to earn credits through WOTC. Tracking the number of new hires provides a baseline for gauging WOTC optimization performance.
**2. Screening Percentage**
The foundation of WOTC optimization is maintaining a high screening percentage. Screening percentage is defined as the number of new W2 employees who have successfully completed the WOTC screening questionnaire. For example, if an employer hires 1,000 new W2 employees in a year and 800 complete the screening questionnaire, the screening percentage is 80%. Ideally, employers should strive for a 100% screening rate.
A high screening percentage ensures more opportunities to earn WOTC credits. This can be achieved through tight integration between the employer’s HRIS/ATS/new hire onboarding system and the WOTC screening questionnaire. Automated integrations help ensure all new hires complete the screening process, reducing inefficiencies and human errors associated with manual or paper-based screenings.
**3. Certification Rate**
Certification rate is the responsibility of the employer’s WOTC vendor and reflects how many screened employees become certified for WOTC. If an employer hires 1,000 new W2 employees, screens 950, and 300 are certified for WOTC, the certification rate is 31.5%. Certification rates vary by industry, with most WOTC providers achieving around 40-50%. Rockerbox, however, boasts a certification rate above 65%.
**4. Average Tax Credit (ATC)**
Average Tax Credit (ATC) measures the retention of WOTC-certified employees. Tax credits are earned only after the employee works at least 120 hours, with greater credits accrued after 400 hours. The longer WOTC-certified employees remain on the payroll, the more credits the employer earns. ATC is calculated by dividing the total tax credits earned by the number of certified employees. For example, if 300 certified employees earn $255,000 in credits, the ATC is $850.
Low ATC may indicate retention issues, while a growing ATC suggests improved retention. ATC varies by industry, with trucking and transportation typically seeing higher ATCs, and home health agencies seeing lower ATCs.
**5. Confirmation Codes**
Managing screening percentages daily is crucial to ensure every new W2 employee completes the WOTC screening questionnaire. Rockerbox’s WOTC Optimization software provides a nine-digit confirmation code upon successful questionnaire completion. Employers can require new hires to provide this code during onboarding to confirm completion. Rockerbox’s system can automatically send these confirmation codes to employers via an open integration interface.
**Why WOTC Optimization Matters**
By optimizing their WOTC programs, employers can significantly enhance their financial performance. A well-optimized WOTC program not only maximizes tax credits but also integrates seamlessly into the hiring and onboarding process, ensuring every potential credit opportunity is captured. This leads to better cash flow, improved hiring strategies, and increased retention rates for WOTC-certified employees.
At Rockerbox, we specialize in helping employers optimize their WOTC programs to achieve these outcomes. Contact us today to learn how we can help you maximize your WOTC benefits and improve your bottom line.