Tax Benefits in Hiring Incentives to Restore Employment Act of 2010

This article briefly and broadly summarizes the tax benefits in the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act), which was signed on March 18. The HIRE Act has two main benefits:

• it exempts employers from the employer's share of Social Security employment taxes on wages paid in 2010 to newly hired unemployed workers
• it provides employers with a tax credit of up to $1,000 for retaining newly hired, unemployed workers.

Payroll Tax Holiday

The relief applies only to the employer's share of Social Security taxes, which is the tax at the 6.2 percent rate. It doesn't apply to the 1.45 percent Medicare portion of the employer's tax, nor to any part of the employee's tax. The amount of tax forgiven per employee cannot exceed $6,621.60 because the Social Security tax applies only to the first $106,800 of wages paid in 2010 (6.2 percent tax x $106,800 = $6,621.60).

The relief applies to wages paid to a qualified individual beginning on March 19, 2010 and ending on December 31, 2010. A qualified individual must certify by a signed affidavit, under penalties of perjury, that he hasn't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the employer. An employee cannot be employed to replace another employee of the employer unless the other employee separated from employment voluntarily or for cause. The individual cannot be a relative of the employer.

An employer may qualify for the payroll tax holiday when it hires an otherwise qualified individual to replace one who was terminated for cause or due to other facts and circumstances, such as cases in which a factory is closed due to lack of demand. When the factory reopens, the payroll tax holiday can be claimed both for rehiring old workers and hiring new workers. However, an employer who terminates an employee without cause in order to claim the payroll tax holiday for hiring the same or another employee doesn't qualify.

Under existing law, employers who hire members of certain targeted groups before September 2011 may claim a work opportunity credit (WOTC) equal to a percentage of up to $6,000 of first-year wages per employee. An employer may elect not to have the payroll tax holiday apply. Unless the employer elects out of the payroll tax holiday, wages paid to a qualified individual won't qualify for the WOTC during the one-year period beginning on the date that the employer hired the individual. An employer may wish to elect out of the payroll tax holiday because the WOTC is in many cases more valuable than the payroll tax holiday.

New Credit for Each Retained Worker

For any tax year ending after March 18, 2010, the HIRE Act provides a credit for "retained workers." This is any person who is a qualified individual for purposes of the payroll tax holiday, was employed by the employer during the tax year for a period of not less than 52 consecutive weeks, and whose wages from such employer during the last 26 weeks of the period equaled at least 80 percent of the wages for the first 26 weeks of the period. The credit is computed by increasing the current year business credit, for each retained worker with respect to which the 52 consecutive week requirement is first satisfied during the tax year, by the lesser of $1,000 or 6.2 percent of the wages paid during the 52 consecutive week period. If a retained worker's wages during the 52 consecutive week period exceed $16,129, the increase to the business credit will be $1,000. For an employer using the calendar year, the increase will be claimed on the employer's 2011 tax return.

Example: Z Corporation, a calendar year taxpayer, hires Rachel, a retained worker, on March 20, 2010. The 52-consecutive-week requirement is first satisfied in 2011 if Rachel works for Z Corporation until March 19, 2011. Rachel's wages for this period are $50,000. Z Corporation can increase its business credit on its 2011 tax return by $1,000 on account of Rachel.