To help stimulate the hiring of workers by the private sector, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. It has several business-friendly tax provisions that immediately benefit qualifying businesses that hire and retain previously unemployed workers.

The first tax benefit comes in the form of payroll tax relief, in which employers may qualify for a 6.2 percent payroll tax incentive, the maximum savings being $6,621 per qualified employee.  The second tax benefit gives qualifying businesses a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.

Let’s look at each of these provisions separately and how employers may benefit.

Payroll Tax Relief for Hiring Unemployed Workers

Employers know that payroll taxes under the Federal Insurance Contributions Act (FICA) are composed of two types of taxes: The first component is for Social Security taxes, which is 6.2% of maximum wages of $106,800 in 2010. The second component of the FICA tax is for Medicare taxes, which is 1.45% of covered wages. Furthermore, an employee is liable for an amount equal to these taxes paid by the employer.

The new HIRE act relieves qualified employers from paying their share of Social Security taxes for the remainder of the year on wages paid to qualifying new hires after March 18, 2010 through December 31, 2010.  However, employers must continue to withhold and pay the employee’s share of Social Security taxes, as well as the employer’s and employee’s share of Medicare taxes.  This temporary relief granted to qualifying employers will not affect the employee’s future Social Security benefits.

A qualified employer is a non-household employer or non-governmental employer, other than public colleges and universities.

 A “qualified employee” is one who meets the following requirements:

• Begins work with a qualified employer after February 3, 2010 and before January 1, 2011.
• Certifies by signed affidavit that he or she has not been employed for more than 40 hours during the 60 days prior to being hired.
• Is not being employed to replace another employee unless that employee left voluntarily or for cause, including downsizing.
• Is not related to the business owner, or doesn’t directly or indirectly own more that 50 percent of the company stock.

New IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is used by the employer to confirm that the new employee is a qualified employee under the HIRE Act. Employers retain the Form W-11 along with other payroll and income tax records. If both employer and employee do not complete the sections applicable to them on this form, the employer can not claim HIRE Act benefits.

Eligible employers will use Form 941, Employer’s Quarterly Federal Tax Return, to account for the payroll tax exemption for eligible new hirers. The form has been revised for use beginning with the second calendar quarter of 2010.  Qualifying employers should report applicable first quarter wages and credits on the second quarter form and factor in any social security tax forgiveness when making payroll tax deposits.

Business Tax Credit for Retaining Newly Hired Workers

Businesses will also be eligible for an additional one-time business tax credit for retaining qualified workers, referred to as the new hire retention credit. The credit is 6.2 percent of wages paid to each new worker who qualifies, up to a maximum credit of $1,000, subject to these conditions:

• The retained worker was hired after February 3, 2010 and before January 1, 2011 under the payroll tax relief provision.
• Continued working for at least 52 consecutive weeks.
• Earned wages in the last 26 weeks that were at least 80% of wages earned in the first 26 weeks.

Business cannot carry back the credit to a taxable year that began prior to March 18, 2010. 

Enhanced Expensing for Small Businesses

The HIRE Act also increases enhanced expensing rules another year, which allow qualifying businesses the option to deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is increased from $125,000 to $250,000.  This election begins to phase out when a business buys more than $800,000 of expensing-eligible assets.

Feel free to call the Laciak>cpa team at 219-864-7000 or email us at info@laciak.com to discuss how these tax law changes affect your particular business. 

Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit

Frequently Asked Questions about the HIRE Act