Business Incentives Under the HIRE Act

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act. One of the important changes affecting businesses is the payroll tax holiday and up-to- $1,000 credit for employers who hire unemployed workers.

To help stimulate the hiring of workers by the private sector, the new law exempts any private sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of Social Security tax on that employee for the remainder of the 2010 tax year. This could result in a maximum tax savings of $6,621 for any previously unemployed worker who is paid at least $106,800 by the end of the year.

As an additional incentive, for any qualifying worker hired under this Act and the employer keeps on the payroll for 52 consecutive weeks, the employer is eligible for an additional non-refundable tax credit up to $1,000. This credit becomes available after the 52-week threshold has been reached. The credit will be taken on the employer’s 2011 tax return. To be eligible for the credit, the employee’s pay in the second 26 week period must be at least 80% of the pay in the first 26 week period.

Workers hired after the introduction date of this legislation (February 3, 2010) are eligible for the payroll tax forgiveness and the retention tax credit. It should be noted, the only the wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.

Here are some additional features of the new hiring incentive:

• The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.

• The tax benefit generally applies to private sector employment, including nonprofit organizations. Public sector jobs are generally not eligible for either benefit, except for employment by a public higher education institution.

• There is no minimum weekly number of hours that the new employee must work to be eligible.

• There is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.

• For workers that would otherwise be eligible for the Work Opportunity Tax Credit, the employer must select one benefit or the other for 2010. Employers cannot double dip on the tax credits.

• An employer can’t claim the new tax breaks for hiring family members.

• A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.

• For the hiring to qualify, the new hire must sign an affidavit (under penalties of perjury), stating he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment began.

• The incentive is not biased towards low-wage or high wage workers. Under this measure, the business saves the 6.2% on both a $15,000 worker and a $100,000 worker.

• The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer in the second calendar quarter of 2010.

• The Act creates a similar new set of rules permitting a payroll tax holiday for railroad retirement tax purposes.

• The credit for retaining qualified new hires is the less of $1,000 or 6.2% of the wages paid by the employer to the retained worker during the 52 consecutive week period. Thus, the credit for a retained worker will be $1,000 if the retained worker’s wages during the 52 consecutive week period exceeds $16,129. This credit is not available for pay not treated as wages under the Internal Revenue Code (for example, remuneration paid to domestic workers).

• Employers can avoid the 6.2% share of Social Security tax on wages paid to students who certify they worked fewer than 40 hours in the previous 60 days. Students who did not work because they were taking classes are not disqualified.

• Employers can rehire a laid off worker and avoid the 6.2% share of Social Security tax as long as the rehired worker worked fewer than 40 hours in the previous 60 days.

• Temporary employment agencies can claim the exemption on the wages of employees sent to clients as long as the employee worked fewer than 40 hours in the previous 60 days.

If you have any questions regarding this Act or any other tax provision, please feel free to contact me at thetaxdude@gmail.com.