It has been a season of exceptional tax breaks for employers under the Obama administration. In an effort to stimulate the hiring of unemployed persons, on March 18, 2010, President Obama signed the new Hiring Incentives to Restore Employment Act (HIRE) into law. This new federal law creates unprecedented tax breaks for employers who hire and retain unemployed workers during a designated period of time.
Employers who act before December 31, 2010, to hire and retain unemployed workers can potentially save tens of thousands of dollars in taxes.
The new tax exemption works like this. Normally, employers are required to pay their share of social security taxes (FICA, or Federal Insurance Contributions Act) on wages earned by employees. The FICA rate for 2010 is 6.2 percent of wages. Under the HIRE Act, employers are excused from paying the 6 percent FICA tax on wages paid to qualified employees from March 18, 2010, through the end of 2010, up to maximum of $6,621 per employee. Employers must still withhold the employee’s portion of FICA and income taxes. However, the employee’s future Social Security benefits will remain unchanged by the new tax exemption.
This new tax exemption is broadly available to all private employers. It applies to for-profit and not-for-profit companies, Indian tribal governments, and public universities and colleges, but generally not to local, state or federal governmental employers. Temporary employment agencies can also take advantage of the tax credit for its qualified employees. Business clients of staffing agencies can also claim the tax credit as long as the employees they hire worked less than 40 hours during the previous 60 days.
So who are “qualified employees?” The test is relatively simple. A qualified employee is someone who is hired to work full- or part-time who:
· Starts work after February 3, 2010, and before January 1, 2011
· Was not employed for more than 40 hours during the previous 60 continuous days
· Was not hired to replace another employee unless the former employee separated from employment voluntarily or for
cause, and
· Is not related to the employer and does not own more than 50 percent of the business (directly or indirectly)
Many types of workers can be considered qualified employees under the new law. High school summer hires and interns may qualify, as the employee need not have been previously employed and then lost a job to qualify. A qualified employee also includes someone who has been laid off and then rehired, as long as the employee worked less than 40 hours during the prior 60 days. The law also applies to new businesses hiring qualified employees.
It is relatively easy for employers to claim the tax credit. The social security tax credit applies to wages earned starting on March 19, 2010. The tax exemption can be claimed on the Form 941 (Employer’s Quarterly Federal Tax Return) beginning in the second quarter of 2010. Payroll taxes for the first quarter of 2010 are treated as an advance payment of taxes owed during the second quarter. To claim the credit, employers must have the qualified employee sign an affidavit (such as a Form W-11) affirming that the employee was unemployed during the 60 days before beginning work or worked fewer than 40 hours for someone else during that period.
These affidavits must be obtained prior to filing a employment tax return claiming the payroll tax credit. The affidavit need not be filed with the IRS, but should be retained by the employer. While employers do not have to independently verify that the employee was in fact out of work for the requisite period, they will be liable for the tax credit in the event the worker is deemed not qualified.
Further tax incentives are also available to employers who retain qualified employees for at least 52 consecutive weeks. Under the HIRE Act, employers receive a general business income tax break equal to the lesser of $1,000 or 6.2 percent of the employee’s wages paid during the 52-week period. No credit can be claimed if the employee quits or is fired before the end of the 52-week period. The tax deduction is taken on the employer’s income tax. The credit cannot be carried back but can be carried forward into 2011.
It is hoped that this new tax credit will stimulate hiring and reduce the unemployment roles. Employers who wish to take advantage of these tax breaks must act quickly, however, as they are only available for a limited time. If you are considering hiring for your business, hire an unemployed worker now and save on your taxes!
Katie Tank is an employment attorney in the Bend office of regional law firm Schwabe, Williamson & Wyatt. She can be reached at 541- 749-4011 or ktank@schwabe.com.
