With the unemployment rate still holding stubbornly near 10%, Congress this month approved a new $18 billion bill that offers tax breaks to employers who add certain new employees to the payroll. President Obama signed it on March 18. The so-called Hiring Incentives to Restore Employment (HIRE) Act comes in two parts:
Immediate payroll tax relief for wages paid to certain new hires. The new law would eliminate the 6.2% Social Security payroll tax you’d pay on wages paid to “qualifying new hires” who:
- Are hired after Feb. 3, 2010, and before Jan. 1, 2011.
- Has not been employed for more than 40 hours during the 60-day period ending on the date employment begins.
- Are not being hired to replace anybody, unless the other employee quit or was fired for cause.
- Are not related to any company owners.
Employers can claim the payroll tax relief starting April 1, 2010, with a special catch-up for post-enactment first-quarter wages paid to qualifying employees. The IRS has published new tax forms (Form W-11 and a new Form 941) for claiming the employer payroll tax relief---see below.)
Business Tax Credit for retained new hires. In addition, the HIRE Act says employers can earn a tax credit equal to 6.2% of the new hire’s salary—up to $1,000—for each new hire that remains on the payroll for 52 consecutive weeks. Employers can take this new credit on their 2011 tax return.
To qualify for this retention tax credit, employers must pay at least 80% of the wages during the second half of the 52-week period that were paid during the first half (26 weeks) of that period.
With both new tax breaks, employers can be eligible for $6,622 per qualifying new hire. There’s no cap on the total amount of tax benefits claimed by employers under the HIRE Act.
The law says only “qualified employers” can take the tax breaks. That includes private-sector companies (both for-profit and nonprofit) and public higher education institutions.
Final note: Employers can’t claim a Work Opportunity Credit (WOTC) for any employee for whom you’re eligible to claim a HIRE Act business tax credit, unless you make an election not to apply the HIRE Act.