Labor shortages aren’t new to the construction industry. While finding skilled labor has been a challenge at different points before, external factors are complicating what’s already been a difficult problem to solve. Construction contractors who are struggling to find new employees may have another strategy to try: recruit from target groups who traditionally face an uphill battle for quality jobs.
The Work Opportunity Tax Credit (WOTC) allows employers to recover between 25 and 40 percent of first-year wages for eligible employees. It’s a win-win-win: the contractor fills open positions, gets a tax break, and provides a job with a meaningful wage to someone who may really need it.
Since WOTC is extended at least through the end of 2025, there’s plenty of time to use it. The trick is that most of the work to confirm eligibility must be done early in the employee’s tenure.
Construction Labor Shortages in 2022
It’s estimated that the construction industry needs to add 650,000 new workers to meet labor demands in 2022.
Existing labor shortages due to COVID-19 are now being made worse by the Great Resignation, just as one trillion dollars in infrastructure spending begins to filter down for new projects. It’s causing job costs to go up, too; AGC reports that costs for publicly funded transportation projects are averaging 20 percent higher due in part to contractors needing to pay workers more and for longer periods of time. Construction wages are rising faster than other industries, too.
Some construction contractors in the Southeast are branching out to boost their hiring efforts with signing and referral bonuses, higher per diems, and advertising for open positions in colder climates.
What Is WOTC?
The Work Opportunity Tax Credit is a federal tax incentive for employers who hire from certain targeted groups. Tax credits range from $2,400 to $9,600 per employee. Originally enacted in 1996, WOTC was due to expire on December 31, 2020 but was extended another five years as part of the Consolidated Appropriations Act. Certifications for new hires reached a five-year high in 2021.
There are three basic steps to claim the credit:
- Hire from an eligible targeted group.
- File a certification request with the state workforce agency.
- Claim the business credit after the employee’s first year of employment.
A certification request using Form 8850 must be filed within 28 days of the employee’s first day of work.
WOTC is a credit against income taxes for private businesses. Not-for-profit organizations can claim the tax credit against payroll taxes.
How Much Is WOTC Worth?
The amount of the tax credit varies according to which targeted group the employee belongs to and how many hours they worked in their first year.
A 40 percent credit can be taken against first-year wages if the employee worked at least 400 hours. A lesser credit of 25 percent is available if the employee worked between 210 and 399 hours.
It’s a one-time credit and employers can’t claim it for the same employee twice if rehired. WOTC is limited to the employer’s business income tax liability or share of Social Security tax owed.
In most cases, WOTC is applied to the first $6,000 in first-year wages for a maximum credit of $2,400 per employee. The rules differ for veterans; in that case, the first $24,000 in first-year wages would apply to WOTC.
Which Target Groups Are Eligible for WOTC?
There are ten eligible groups under WOTC. The IRS has more detailed information on each of these groups.
- Qualified IV-A Recipient
- Qualified Veteran
- Ex-Felon
- Designated Community Resident
- Vocational Rehabilitation Referral
- Summer Youth Employee
- SNAP Recipient
- SSI Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployed Recipient
Some employees will already have a conditional certification from their state workforce agency. Though not required, conditional certifications help employers identify WOTC-eligible prospective employees.
These are examples of places where employers can potentially recruit from targeted groups.
- Social services office
- Job training facilities
- Veterans Administration
- Department of Corrections
- American Job Centers
- Workforce Innovation and Opportunity Act grant recipients
Federal Bonding Program
Another incentive to hire from targeted groups, the Federal Bonding Program (FBP) is a free, no-application program that applies to some of the same individuals as WOTC. When an employer hires someone from a targeted group, the Department of Labor provides a fidelity bond to protect the employer against employee fraud.
To qualify, the employer must pay wages that automatically deduct federal taxes. Both full- and part-time employees are eligible. Fidelity bonds will reimburse the employer up to $5,000 if the employee steals money or property in the first six months on the job.
Though not a tax incentive, the FBP acts as a sort of safeguard for employers to hire people who may have a bit of a checkered past. If hired, the following are all individuals who would be covered under the FBP.
- Ex-felons*
- TANF recipients*
- Those with poor credit history
- Substance abuse recovery
- Former military members who were dishonorably discharged
- Economically disadvantaged youth and adults with little to no work history**
*Also qualifies for WOTC
**May also qualify for WOTC
WOTC Could Help Ease Labor Shortage
2022 is proving to be one of the most challenging, dynamic work environments in recent memory. While many factors may be outside construction contractors’ control, there are still opportunities to find talent. If your firm is struggling to find labor, consider recruiting from a WOTC-eligible targeted group. Since it’s still summertime and students are home from college, contractors could consider hiring eligible summer youth employees; WOTC would be available if the youth employee can get at least 120 hours in their first year of employment.
For questions about the Work Opportunity Tax Credit, contact PBMares Partner and Construction and Real Estate Team Leader Jennifer French, CPA.
