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Ready, aim, hire! Target unemployeds for payroll tax breaks

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in Hiring,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

The new Hiring Incentives to Restore Employment Act (HIRE) Act of 2010 provides a couple of key payroll tax breaks for employers that hire new employees.

Strategy: Zero in on certain unemployed workers. If your company hires a “qualified employee,” the business is exempt from the employer’s 6.2% Social Security tax portion of the FICA tax on the employee’s wages for the rest of 2010. Plus, the company is entitled to a new tax credit if it keeps the worker employed for at least 52 consecutive weeks.

These new breaks apply to qualified employees who begin working for your company after Feb. 3, 2010, and before Jan. 1, 2011.

Tax break No. 1: Skip a payroll tax liability

Normally, an employer must pay the 6.2% Social Security tax portion of the FICA tax on an employee’s wages up to a specified annual amount ($106,800 for 2010). The employer’s 1.45% Medicare tax portion of the FICA tax applies to all wages.

But the new law waives the employer’s Social Security tax bill on wages paid to qualified employees for employment between March 19, 2010, and Dec. 31, 2010. A qualified employee is one who:

  • Starts work for your company after Feb. 3, 2010, and before Jan. 1, 2011
  • Has not been employed for more than 40 hours during the previous 60 days
  • Was not hired  to replace another employee (unless the former employee separated from employment voluntarily or was discharged for cause)
  • Is not related to the employer
  • Does not own, either directly or indirectly, more than 50% of the company.

A qualified employee may work for any number of hours on a part-time or full-time basis.

Example: Your company hires an unemployed worker on a part-time trial basis on May 10. On July 1, it promotes the employee to a salaried position. For the period spanning May 10 through Dec. 31, the employee receives $30,000 in wages. Result: Your company saves $1,860 (6.2% of $30,000) in Social Security tax in 2010.

The Social Security tax exemption on qualified wages paid in March will show up as a credit on the employer’s second quarter federal employment tax return (Form 941).  For qualified wages paid after March, you can take this tax break into account when making your regular payroll tax deposits.       

Note that the new tax break has no effect on the employee’s 6.2% share of the Social Security tax. Employers must still withhold the full 6.2% on wages up to $106,800 for 2010.

Also, the Social Security tax exemption break must be coordinated with the Work Opportunity Tax Credit (WOTC) for hiring workers from certain disadvantaged groups. You can’t claim the Social Security tax exemption for wages used to claim the WOTC. 

Tax break No. 2: Retain workers for credits

In addition to the Social Security tax exemption for hiring qualified employees, you can secure a tax credit for keeping these workers employed for at least 52 consecutive weeks. Each credit, which is added to the general business credit, equals the lesser of $1,000 or 6.2% of the wages paid to the worker during the 52-week period. This prevents employers from maxing out on $1,000 credits for employees who work only minimally.

Example: Your company hires an unemployed worker on May 10. The worker receives $5,000 in wages for the period spanning May 10, 2010, through May 9, 2011. Therefore, your company’s credit for this worker is limited to $310 (6.2% of $5,000).  

To further discourage abuse, the new law requires that wages paid to the qualified employee during the last 26 weeks of the 52-week period must equal at least 80% of the wages paid during the first 26 weeks of the 52-week period.

The new tax breaks are offset by tougher foreign tax compliance rules, a further delay (until 2021) in the application of the worldwide interest allocation rules and accelerated requirements for corporate estimated tax payments in future years.

Tip: The HIRE Act does not address an alternative minimum tax (AMT) patch, estate taxes or other expired tax provisions beyond the Section 179 deduction rules (see box below). Stay tuned for more legislation.

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{ 1 comment… read it below or add one }

scobby December 14, 2011 at 11:42 am

Businesses are abusing this tax credit. The government needs to put a stop to this. For the past two years the companies I have worked for have fired all of their staff after a year of employment. They cite frivolous reason but the companies are still doing it. And they are rehiring constantly. Nothing but turnover. I don’t believe reputable companies constantly turn over their entire staff every 6 months to a year nonstop.

They are getting the tax breaks and what they are really doing is laying people off at one time but lying to the unemployment office like the people are being fired when this is not true. What business can have 50% bad employees nonstop constantly that they have to constantly turn over their workforce?

The is directly affecting minorities too might I add.. And created a constantly shifting workforce of constantly displaced workers.

This law has had unintended consequences… bad ones especially in Texas where I live…

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