Davis & Bellomo

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act of 2010 (2010 HIRE Act) into law. The 2010 HIRE Act has several business-friendly tax provisions that may benefit your business, including a payroll tax exemption and increased income tax credits for employers whose employees meet certain eligibility requirements. The legislation immediately enhances employers’ cash flow by permitting employers to retain the employer portion of the Social Security tax ordinarily remitted. Additionally, the Act benefits businesses that retain those workers.

Social Security Tax Exemption

Currently, among other payroll taxes, employers must pay 6.2% of an employee’s wages in Social Security taxes shortly following payroll.  Under the HIRE Act, the 6.2% employer Social Security tax exemption applies to previously unemployed individuals hired after February 3, 2010 who have worked less than 40 hours during the 60-day period prior to employment.  The exemption from the 6.2% employer’s portion of Social Security tax applies to wages up to $106,800 earned after March 18, 2010 and before January 1, 2011.  Note, this exemption does not apply to the portion of Social Security tax paid by the employees.

 Employers can save the 6.2% employer portion of Social Security tax regardless of the wages the new employee is paid. Employers, including nonprofit organizations, and colleges and universities, do not have to wait until 2011 to benefit from this tax relief because savings are realized each pay period.

The HIRE Act also encourages businesses to hire workers earlier in the year as the tax benefits are greater. For example, a $60,000 worker hired on April 1 saves an employer about $2,800 in taxes. Delaying the hiring until June 1 would reduce savings to about $2,200.  The earlier an employee is hired, the greater the tax benefit to the employer.

This exemption has no cap or limit as to the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying worker, whether they hire one new employee or many new employees.

Income Tax Credit for Retention

In addition to the Social Security tax exemption discussed above, employers will also receive an income tax credit for retaining these new employees.  Unlike the Social Security tax exemption that provides tax relief as the employee is paid, this income tax provision is realized in 2011 after the employee completes the requisite 52-consecutive week employment period required by the act.  The income tax credit will be either $1,000 for each qualifying worker hired after February 3, 2010, and employed for at least 52 consecutive weeks, or 6.2% of wages paid to the qualifying worker over the 52-week period, whichever is less.   Qualified employees earning $16,130 in annual wages or more should qualify for the full $1,000 income tax credit.  Employees earning less than $16,130 qualify for the credit but the credit is limited to 6.2% of wages paid to the employee.  Please note that wages during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks.  This provision will likely effect hourly employees more than salaried employees as it requires businesses to pay qualified employees consistently in order to qualify for the credit. 

Qualified Employees

To qualify for both the Social Security exemption and the retention tax credit provisions of the HIRE Act, the employee must begin work after February 2, 2010 and before January 1, 2011.

Newly  hired employees must certify "by signed affidavit," under penalties of perjury, that he/she has "not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment." A copy of the required affidavit, IRS form W-11, is attached.  Please note that this does not exclude recent graduates.  Any worker who was not employed more than 40 hours during the last 60 days is a qualified employee under the HIRE Act. 

Neither the 6.2% Employer Social Security tax exemption nor the retention tax credit is permitted if a person is hired to replace another employee "unless such other employee is separated from employment voluntarily or for cause."

Finally, new employees must not be related to the employer.  This is generally intended to prevent business owners from artificially “hiring” their relatives for tax purposes and circumventing the spirit of the act.

Qualified Employers

Any employer other than federal, state, or local government is qualified under the HIRE Act.  Public higher education institutions, however, do qualify.

Election to Expense Depreciable Business Assets:

The Act further extends the higher $250,000 limit established by the American Reinvestment and Recovery Act of 2009 for small business expensing for an additional year. Under the provision, businesses can continue to double the immediate write off for capital investments and purchases of new equipment made in 2010 from $125,000 to $250,000.

Feel free to contact us to discuss how these tax law changes affect your particular circumstances or to discuss any other financial matter.