If you’re a business owner who is thinking about hiring new employees or bringing back employees previously laid off there are two new tax incentives you should be aware of. These incentives were included in the Hiring Incentives to Restore Employment (HIRE) Act passed last spring. A few weeks ago I discussed the first incentive: an exemption equal to the employer’s 6.2% share of Social Security tax on wages paid to previously unemployed new hires. Today, I will review the Social Security Exemption and briefly discuss the second incentive, called the “Hire Retention Credit.” If you keep these incentives in mind, at least until December 31, 2010 – the hiring deadline for both incentives, you could save your company thousands per employee in employment related costs.
To claim the Social Security Exemption or the Hire Retention Credit employers must hire “qualified employees.” For the purposes of the HIRE Act, a qualified employee is an individual who has worked as an employee for 40 hours or less during the 60 day period prior to the date they start working. Although the new hire cannot be the employer’s family member, virtually any other new hire will qualify for the exemption and credit, including: employees previously laid off by the same employer, recent high school or college graduates, part-time seasonal employees, paid interns and part-time high school students. Even previously or currently self-employed individuals will qualify as long as they have not worked as an employee for 40 hours during 60 days prior to their hire date.
The position for which the employee is hired does not have to be a new position at the business. If the new employee otherwise qualifies, they can replace a previous employee so long as that employee quit voluntarily or was justifiably terminated.
To claim the exemption and credit, each qualifying employee must sign a sworn affidavit, under penalties of perjury, affirming that they have not been employed more that 40 hours during the 60 days preceding employment. To this end, the IRS has created Form W-11, Hiring Incentives to Restore Employment Act Employee Affidavit (a copy can be obtained at HBSbusiness.com). The employer must have a signed Form W-11 from each qualifying employee prior to claiming the exemption. The employer must keep the affidavit(s) on file. They are not mailed to the IRS.
The exemption is equal to the employer’s 6.2% share of Social Security Tax on the wages paid to a qualifying employee between March 19, 2010 and December 31, 2010. The exemption does not apply to the employer’s share of the 1.45% Medicare Tax and will not affect the employees’ net-pay. Employers claim the credit on Form 941, the quarterly report that reconciles remittances of Federal Withholdings, Social Security and Medicare.
The Hire Retention Credit is a general business credit available to employers who: 1) hire employees that qualify for the social security exemption discussed above, 2) employee these employees for at least 52 consecutive weeks, and 3) during the last 26 weeks of the 52 week period, pay each employee at least 80% of the wages earned during the first 26 weeks of the same 52 week period. The credit is claimed on the employer’s 2011 income tax return and is equal to 6.2% of wages paid during the 52 week period, up to $1,000 per qualifying employee.
The savings offered by the social security exemption and Hire Retention Credit add up quickly. For example: an employer who hires a single qualifying employee for a position that pays $25,000 annually, $20,000 of which was earned in 2010, would receive a exemption of $1,240 for the employer’s share of Social Security Taxes in 2010 ($20,000 times 6.2%) and $1,000 for the Hire Retention Credit ($25,000 times 6.2% is $1,550 but is limited to $1,000). That adds up to $2,240 in working capital a business would have otherwise paid to Uncle Sam.
In today’s article we reviewed the basics of the tax incentives included in the HIRE act. We did not discuss how these incentives may apply to your specific tax situation. If you have any questions, please feel free to contact our office to consult with a qualified tax professional.
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