The recently enacted Hiring Incentive to Restore Employment Act (“HIRE”) created two new tax benefits to encourage employers to hire and retain new workers. Employers who hire qualified employees may be eligible for a 6.2% payroll tax exemption. In addition, employers may also claim an additional general business tax credit of up to $1,000 on their 2011 income tax returns for each qualified employee retained for at least a year. The tax benefits apply to employers filling new positions as well as to employers filling existing positions due to workers leaving voluntarily or leaving for cause.
The payroll tax incentive exempts employers from paying their share of Social Security tax on wages paid to qualified employees from March 18, 2010 through December 31, 2010. The reduced tax withholding will have no effect on the employee’s future Social Security benefits. Employers must still withhold a qualified employee’s share of Social Security taxes as well as the employee’s income taxes. The employer and employee still must both pay their share of Medicare taxes.
The incentive applies to low wage and high wage workers – employers save the social security tax on both a $40,000 worker and a $90,000 worker. No matter how many new workers are hired, an employer can save up to $6,622 per qualifying worker. As a result, there is no cap on the total amount of tax benefits that an employer can claim.
In addition, employers will be eligible for the new hire retention credit for each qualified employee retained for at least 52 continuous weeks. The credit for each employee equals the lesser of $1,000 or 6.2% of wages as defined for income tax withholding purposes. To qualify for the credit, the employee’s pay cannot decease significantly in the second half of the year. Employers will take this general business tax credit on their 2011 tax return. The credit cannot be carried back, but may be carried forward.
A qualified employee is an individual who began employment with an employer after February 2, 2010 and before January 1, 2011 and who has been unemployed or employed for less than 40 hours during the 60-day period ending on the date that employment began. The individual need not have lost his or her prior job. Family members or other relatives of the employer cannot be qualified employees.
The law requires that employers obtain a statement (under penalties of perjury) from eligible new hires stating that they have not been employed for more than 40 hours during the 60 days before beginning work. Employers can use Form W-11, Hiring Incentives to Restore Employment Act Employee Affidavit, to meet this requirement. The certifications do not need to be filed with the IRS but should be retained with the employer’s other payroll and tax records.
Eligible employers may use Form 941, Employer’s Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form has been revised for use beginning with the second calendar quarter of 2010.
Businesses, public colleges and universities, tribal governments, agricultural employers, and tax-exempt organizations all qualify to claim the payroll tax exemption. Household and public sector employers generally are not eligible.
HIRE also permits small business owners to write off up to $250,000 of equipment and machinery investments for 2010 rather than recovering the cost by depreciating the asset over a number of years. However, the election phases out if a business purchases more than $800,000 of eligible assets.
Contact one of our Michigan labor and employment attorneys if you plan to add new employees to your business and are interested in taking advantage of these new tax incentives.