Employer Alert: It May be Time to HIRE!
On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment Act (HIRE Act) into law, which can result in up to $7,621.00 in tax incentives for employers for every unemployed worker hired between February 3, 2010 and December 31, 2010.
These tax incentives take two forms: (1) a payroll tax holiday equal to the employer’s 6.2% share of the hired employee’s social security taxes between March 19, 2010 and December 31, 2010; and (2) a general business tax credit of up to $1,000 if the employer retains the employee for one year after hire.
All private sector and non-profit employers are eligible for these incentives. While public sector employers are not eligible, an exception does exist for public colleges and universities. Additionally, employers should be aware that if the employment also qualifies for the Work Opportunity Tax Credit, the employer must choose between the two options.
An employee is “qualified” if the employee:
(1) was hired after February 3, 2010, and before January 1, 2011;
(2) signs an affidavit confirming that the employee has not been employed for more than 40 hours during the 60-day period preceding the date the employee commences employment;
(3) was not hired to replace another employee unless the other employee voluntarily left the position or was terminated for cause; and
(4) is not a family member of the employer.
The IRS has just completed development of an affidavit to be signed by the employee certifying that the employee was unemployed in the 60 days preceding commencement of employment. The affidavit can be found on the IRS website or by clicking here.
Significantly, the law applies both to employees hired in existing and newly opened businesses. The HIRE Act also applies to employees previously laid off from the employer, then re-hired, irrespective of whether the employer benefitted from the COBRA premium assistance credit. Finally, the fact that the employee was in school or a recent graduate does not impact eligibility.
Payroll Tax Incentive
Once the employee is qualified, the employer is entitled to the payroll tax holiday. This can result in savings to the employer of up to $6,621.00 per employee (6.2% of the maximum amount of $106,800 subject to social security taxes). As an example, for every employee paid $30,000 per year, the employer would save $1,860.00 in social security taxes. While the employer must still withhold the employee’s 6.2% share of social security and other taxes, the law exempts the employer from paying its respective share of social security taxes during 2010. This results in an immediate, and potentially significant, positive cash flow to the employer.
The payroll tax incentive will be claimed on the employer’s Form 941 on its quarterly return, beginning with the second quarter of 2010. The exemption for wages paid during the first quarter of 2010 will also be claimed on Form 941 for the second quarter.
Business Tax Credit
Employers may also be eligible to receive a tax credit for a qualified employee under the HIRE Act if: (1) the employee was maintained on payroll for 52 consecutive weeks; and (2) the payments to the employee during the last 26 weeks of the 52-week period were at least 80% of the amount paid to the employee during the first 26 weeks of that period.
The tax credit is equal to the lesser of: $1,000 or 6.2 percent of the wages paid by the employer to the employee during the one year period. Thus, for all employees earning over $16,129.00 during that year, the tax credit will reach the maximum $1,000.00.
Conclusion
While the HIRE Act certainly contains valuable and viable incentives, many key questions remain unanswered. To date, there has been little guidance from the IRS regarding the implementation and enforcement of the HIRE Act. However, every employer should invest the time to consider its applicability and consider that factor when making hiring (and termination) decisions.
Employers can monitor the IRS website (www.irs.gov) for updated forms and information. For questions regarding eligibility and applicability, further updates on developments in the law, or regarding the HIRE Act in general, please contact Rob Tribeck at rtribeck@rhoads-sinon.com or 717.237.6701.