Tax Incentives for Businesses Hiring and Retaining Workers
The
Hiring Incentives to Restore Employment (HIRE) Act, signed into law March 18, 2010, offers incentives for companies hiring unemployed people plus an additional credit for each qualified retained worker. Employers can take advantage of reduced payroll taxes and increased tax credits as long as they meet certain eligibility requirements.
“A company probably won't hire employees just for these incentives, but if they’re considering expanding their workforce, they should know the provisions are available and how to obtain the benefits,” says John Berens, a principal with LarsonAllen who specializes in tax issues affecting closely held companies.
The law also extends into 2010 the increased Section 179 expensing allowance for the purchase of certain depreciable business assets.
Payroll tax forgiveness for hiring unemployed workers
Under the new law, employers will be exempt from paying the 6.2 percent Old-Age, Survivors, and Disability Insurance (OASDI) portion of Social Security tax on wages paid to qualified individuals. The tax will not apply on wages paid to qualified individuals for employment after March 18, 2010, and prior to January 1, 2011.
Employer and employee qualifications
All business types qualify with the exception of federal, state, or local governments (public higher education institutions do qualify). An employer may elect against the incentive on an employee-by-employee basis.
A qualified individual is anyone who:
- Begins work for a qualified employer after February 3, 2010, and prior to January 1, 2011
- Certifies by signed affidavit, under penalties of perjury, that he or she had not been employed for more than 40 hours for the 60 days prior to employment starting. Use Form W-11 for this purpose.
- Is not employed to replace a terminated employee, unless the former employee voluntarily separated from employment or was separated for cause
- Is not related to the employer, using rules similar to those that apply to the Work Opportunity Tax Credit (WOTC). If needed, consult your tax advisor for specific barred relationships.
Previously laid off workers now rehired qualify for the payroll tax forgiveness provision. It also applies to Railroad Retirement taxes.
How the payroll tax exemption works
The example below shows how an employer can benefit from payroll tax savings by hiring unemployed workers.
ABC, Inc. hires three qualified individuals on April 1, 2010, as follows:
Name
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Wage Amount to 12/31/10
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Nancy
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$120,000
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Harry
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$40,000
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Joe
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$70,000
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Assume that all three employees meet the requirements for the payroll tax exemption and certify they have not been employed for more than 40 hours the 60 days prior to April 1, 2010.
ABC’s payroll tax savings would be:
Nancy
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$6,622 (6.2 percent x $106,800 [OASDI limit])
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Harry
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$2,480 (6.2 percent x $40,000)
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Joe
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$4,340 (6.2 percent x $70,000)
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Total Tax Savings
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$13,442
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Tax Tip
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ABC may also qualify for the credit for retaining newly hired individuals, as described below. However, this credit would not be available until 2011, as the eligible person must be employed for at least 52 consecutive weeks to earn the credit.
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Tax incentive begins with second quarter
Although a qualified individual beginning work after February 3, 2010, can be eligible for the provision, the OASDI tax of the employer is only forgiven for wages paid for services performed after March 18, 2010.
Payroll tax forgiveness does not apply to wages paid during the first quarter of 2010. Rather, whatever amount would have been forgiven in the first quarter of 2010 is instead credited against the employer’s OASDI liability for the second quarter of 2010. Starting April 1, 2010, an employer can directly reduce its payroll tax deposit under the payroll tax forgiveness provision. The delay to the second quarter of 2010 allows payroll departments and the IRS time to make needed software modifications.
According to Andy Biebl, a tax principal with LarsonAllen, employers need to act quickly to eliminate the 6.2 percent employer Federal Insurance Contributions Act (FICA) tax portion on any qualified new hire payroll effective April 1. He adds, “Businesses will need to review their records for any new hires who began work after February 3, to determine which are eligible for the two new incentives.”
Example: Worker Hired During the First Quarter of 2010
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Acme, Inc., a qualified employer, hires Susie, a qualified individual, on February 15, 2010. Acme is required to pay the regular OASDI tax on wages paid to Susie during the first quarter of 2010. However, Acme’s portion of the OASDI tax paid on Susie’s wages during the first quarter of 2010 that occur after March 18 is offset against the OASDI tax of Acme for the second quarter of 2010. The amount will be claimed as a credit on the Form 941 which Acme files for the second quarter of 2010.
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Choosing between the payroll tax exemption and the WOTC
The WOTC provides a tax credit to employers that hire specified categories of disadvantaged workers. Employers must select either the payroll tax forgiveness provision or the WOTC, the former being the default. The WOTC will not apply to any wages paid or incurred to a person qualifying for the payroll tax exemption during the one-year period beginning on the hiring date of the individual, unless the employer elects against the payroll tax exemption.
“The WOTC may be more valuable in situations involving low-wage employees hired late in the year, because the WOTC is a maximum 40 percent credit of qualified first-year wages of up to $6,000, whereas the payroll tax forgiveness applies to only 6.2 percent of wages paid through December 31, 2010,” Biebl says.
Example: Payroll Tax Forgiveness vs. WOTC
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Al, a qualified individual, is hired by Growth Co. on December 1, 2010. During the month of December 2010, he is paid $4,000 of wages.
The payroll tax forgiveness provision would result in a total tax savings of $248 to Growth Co. ($4,000 x 6.2 percent). Alternatively, if Al was a member of a targeted category for the WOTC and earned at least $6,000 of wages in his 12 months of employment, the WOTC maximum credit would be $2,400 ($6,000 of wages x 40 percent). In this situation, Growth Co. would benefit by electing out of the payroll tax forgiveness provision for Al and instead claiming the WOTC credit on the wages.
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Tax Tip
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A qualified individual may be hired either full time or part time. There is no limit on the number of persons hired or the total amount of payroll tax savings that can be claimed by an employer. Employers can save up to $6,622 per hire ($106,800 x 6.2 percent).
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Business credit for retention of certain newly hired individuals
Effective for taxable years ending after March 18, 2010, employers are eligible for a tax credit for “retained workers.” A “retained worker” is a qualified individual (defined per the four criteria for the payroll tax exemption described above) who:
- Is employed by the employer on any date during the taxable year
- Continues to be employed by the same employer for a period of not less than 52 consecutive weeks
- Earns wages for the employment during the last 26 weeks of the 52-week period that are at least 80 percent of the wages for the first 26 weeks
Special rules apply regarding the definition of qualifying wages. Consult your tax advisor for details.
The credit amount is an amount equal to the lesser of $1,000, or 6.2 percent of wages paid by the employer to the qualified retained worker during the 52-consecutive week period following hire.
Tax Tip
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This 6.2 percent of wage limitation was added to prevent qualification for the full $1,000 credit for minimal part-time hourly employees. Under this limitation, $16,129 of wages will be required to earn the full $1,000 credit ($16,129 x 6.2 percent = $1,000).
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A full 52 weeks of employment is required to qualify for the credit. If an employee voluntarily terminates in less than 52 weeks, no credit is allowed. Due to this rule, and because a “qualified individual” must begin employment after February 3, 2010, the first credits will be earned in February of 2011. The last credits will be earned the last week of December 2011 (because the last date of hire of a qualified individual is December 31, 2010).
Example: Computation of Credit for Retaining Newly Hired Individuals
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Reten, Inc., a calendar year taxpayer, hires Linda to begin employment on February 8, 2010. The 52-consecutive-week requirement is first satisfied in Reten’s 2011 taxable year if Linda works for the company through February 4, 2011. If Linda’s wages for the 52-consecutive-week period exceed $16,129, Reten’s business credit on its 2011 tax return is the maximum amount of $1,000.
Variation: Assume that Linda terminates employment for Reten on December 15, 2010. Because Linda worked for Reten less than 52-consecutive-weeks, Reten is not eligible to claim any credit for the wages paid to Linda during her time of employment.
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Tax Tip
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This $1,000 employee retention credit is a business credit that does not offset the alternative minimum tax of a taxpayer. Accordingly, the value of this credit may be limited for some taxpayers. Any business credit earned in excess of current year tax may not be carried back to a taxable year beginning before March 18, 2010.
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Increase in Section 179 allowance
For the past two years, Congress has allowed a Section 179 expensing amount of $250,000, with the placed-in-service phaseout threshold at $800,000 of eligible asset additions. Both of these are extended an additional year to apply for taxable years beginning in 2010. For example, a taxpayer with an October 31 fiscal year-end is eligible for the increased limits through its fiscal year ending October 31, 2011.
No extension on 50 percent bonus depreciation
The 50 percent bonus depreciation provision that was effective for qualified property placed in service from January 1, 2008 through December 31, 2009, was NOT extended by the HIRE Act, nor is it included in either the House or Senate versions of the tax extender legislation currently making its way through Congress. Unless it is added prior to finalization, 50 percent bonus depreciation is inapplicable for assets purchased on or after January 1, 2010.
For more information, contact a tax principal in your region or read the IRS release.