Jobs bill offers tax incentives for hiring (and keeping) the unemployed

Back in March, health care reform grabbed most of the headlines, but it wasn’t the only legislation enacted that month. About a week earlier, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act.

The act offers payroll tax breaks for employers that hire unemployed workers, plus additional credits for qualified workers they retain for at least 52 consecutive weeks. It also extends the enhanced Section 179 expensing allowance and makes several other tax changes.

Who's elegible? Businesses and nonprofit organizations of all types and sizes are eligible for the hiring and retention breaks. But these breaks aren’t available to federal, state or local governments, except for state colleges and universities.

An employee qualifies for payroll tax breaks if he or she:

• Starts work after Feb. 3, 2010, and before Jan. 1, 2011,

• Wasn’t employed for more than 40 hours during the 60-day period before the start date (and signs an affidavit to that effect),

• Doesn’t replace an existing employee (except one who quits voluntarily or is fired for cause), and

• Isn’t related to the employer or to an individual who owns more than 50% of the employer.

Qualified employees include previously laid-off workers that you rehire, provided they meet the above requirements. Employment can be full-time or part-time, but the more hours a qualified employee works, the greater the benefits.

What are the benefits? If you hire qualified employees, you’re exempt from the 6.2% Social Security portion of Federal Insurance Contributions Act (FICA) taxes on wages you pay them for work performed after the HIRE act was enacted (March 18, 2010) through the end of the year. Based on the current Social Security taxable wage base of $106,800, the maximum tax benefit is $6,622 per qualified employee.

What about the retention break? For each employee qualifying for the payroll tax break whom you keep on the payroll for at least 52 consecutive weeks, you’re entitled to a tax credit of up to $1,000 on your 2011 income tax return. To qualify for the credit, an employee’s wages for the second half of the 52-week period must be at least 80% of his or her wages for the first half of the period. Even if a new hire leaves voluntarily before 52 consecutive weeks, no retention credit is received for that hire.

To prevent employers from claiming the full $1,000 credit for employees who do minimal part-time work, the amount of the credit is the lesser of $1,000 or 6.2% of a qualified employee’s wages during the 52-week period. Put another way, new hires who earn more than $16,129 during that period qualify for the full $1,000 credit.

Retained worker credits are claimed as part of the general business credit under Internal Revenue Code Sec. 38(b). Under the HIRE act, however, no portion of an employer’s unused Sec. 38(b) credit that is attributable to retained worker credits may be carried back to tax years beginning before the HIRE act’s enactment date.

Act sooner rather than later. If you’re thinking about adding to your workforce, keep in mind that the HIRE act’s payroll tax incentives are available for wages paid through the end of 2010, so the sooner you act, the greater the benefits. And the retained worker credit is limited to employees hired this year, so you must hire employees by Dec. 31 to benefit. Also, be sure to compare the HIRE act’s payroll tax break to the Work Opportunity Tax Credit (WOTC), because you can’t claim both for the same employee. (See the sidebar “Payroll tax exemption vs. WOTC: How to choose.”)

Sidebar: Payroll tax exemption vs. WOTC: How to choose Wages you pay to a worker who qualifies for the Hiring Incentives to Restore Employment (HIRE) Act’s payroll tax exemption (see main article) don’t qualify for the Work Opportunity Tax Credit (WOTC) unless you elect not to claim the payroll tax exemption. So it’s important to select the tax break that provides the greater benefit.

The WOTC is a dollar-for-dollar reduction in federal tax liability for companies that hire people from certain disadvantaged groups. Generally, the maximum credit is 40% of first-year wages up to $6,000, or $2,400 (though credits may be higher or lower for certain groups).

For some new employees, the WOTC will provide a greater benefit than the HIRE act’s payroll tax exemption. Suppose, for example, that you hire a new employee on July 1, 2010, at an annual salary of $50,000, and the employee qualifies for both tax breaks. The payroll tax exemption would provide tax savings of $25,000 × 6.2%, or $1,550. In this case, you’d be better off opting out and claiming the $2,400 WOTC.

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