As an employer, before you make the decision to hire a new employee, consider this:  Besides the fact that you need someone’s help, you always have to consider the cost of hiring. One of the costs is you have to pay one half of a worker’s social security tax, which is 6.2 percent of his/her salary. Does that expense make you hesitate? If your answer is yes, then there’s some good news which will help to solve your problem. So, go ahead, hire these people you need. STOP HESITATING, ACT FAST.

Good News

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act (“HIRE Act”) into law, which creates two new tax benefits designed to encourage employers to hire and retain new workers.

•      Employers’ portion of social security tax will be temporarily waived (“Payroll Tax Holiday”) on new hires.

•      Those who retain new hires for 52 consecutive weeks can take a non-refundable business credit up to $1,000 (“Business Credit for Retention”).

Payroll Tax Holiday

It’s a payroll tax provision that exempts a qualified employer from the matching 6.2 percent share of social security tax (up to $6,621.60) on all wages paid to each qualified employee from March 19, 2010 through December 31, 2010. Beginning with the second quarter of 2010, ¹ qualified employers can claim the payroll tax exemption on FORM 941, Employer’s Quarterly Federal Tax Return (see available draft version at http://www.irs.gov/pub/irs-dft/f941--dft.pdf).

A qualified employee must sign Form W-11, HIRE Act Employee Affidavit, to certify that he or she has been unemployed or has not been employed for more than a total of 40 hours during the 60-day period ending on the date they started employment. (Form W-11 is available at http://www.irs.gov/pub/irs-pdf/fw11.pdf ).  WITHOUT FORM W-11, THE EMPLOYER CANNOT CLAIM CREDIT.

•      Qualified employers:  employers in taxable businesses, tax-exempt organizations and agricultural enterprises qualify.    

•      Non-Qualified employers: Federal, State or Local government employers generally do not qualify. Household employers also do not qualify.

•      Qualified employees: individuals hired by a qualified employer after February 3, 2010, and before January 1, 2011, who have been unemployed or employed for less than a total of 40 hours during the 60-day period ending on the date they started working for the qualified employer. Even a recent graduate who was not employed while in school will qualify, assuming he or she meets the other qualifications. There’s no minimum hour requirement for the employment of qualified new hires.

•      Non-Qualified employees: Individuals hired to replace another employee unless that other employee quit voluntarily, or was terminated “for cause”.  The family members of a 50%-or-more owner of the business will also not qualify.

¹ The Payroll Tax Holiday credits are available for qualifying wages paid beginning March 19, 2010.  Since the IRS did not have time to modify the form for the first quarter 2010, credits for the period of March 19 through March 31 will be treated as an additional prepayment on the Form 941 for the second quarter.

No Double Dipping

If employers choose the payroll tax exemption, they can’t also take the Working Opportunity Tax Credit (“WOTC”).  On the other hand, if they choose the Working Opportunity Tax Credit, they can elect out of the payroll tax exemption.

However, employers who claim the COBRA premium assistance credit can also take the payroll tax exemption at the same time.

If you want to learn more about the WOTC or the COBRA premium assistance credit, please contact our office.

Business Credit for Retention of New Hires

This is a general business credit of up to $1,000 that an employer may claim for each employee who is (a) a qualified employee for purposes of the Payroll Tax Holiday, (b) who stays for 52 consecutive weeks, and (c) whose wages during the last 26 weeks of that period equaled at least 80% of his/her wages for the first 26 weeks.

Definition of wages for purpose of the up-to-$1,000 credit

Wages include all remuneration for services performed by an employee for his employer that is subject to income tax withholding. Thus, compensation that isn’t subject to withholding or is exempt from withholding would NOT qualify as wages for the purpose of the credit.

Amount of the credit

The credit is equal to the lesser of:

•      $1,000; or

•      6.2% of the wages paid to the retained worker during the first 52-consecutive-week-period.

Employers that use the calendar year as their tax year will claim the credit only on their 2011 tax return.  For example, if an employer hires an individual on February 5, 2010, the individual has to stay till February 4, 2011 to satisfy the 52-consecutive-week requirement. Since the requirement is satisfied in 2011, the credit is claimed on 2011 tax return.

Employers that use the fiscal year as their tax year will claim the credit on the fiscal 2010/2011 and/or the 2011/2012 return, depending on when the 52-week period for each qualifying employee is satisfied.  For example, an employer that uses a fiscal year beginning on December 1, 2010 and ending on November 30, 2011 hires an individual on December 10, 2010. The 52-consecutive-week requirement will be satisfied on December 9, 2011. The employer can claim credit on the return for the year ending November 30, 2012.

Unlike the payroll tax holiday exemption, employers that claim the Business Credit for Retention can still also claim the WOTC.

Carryback limit

Although employers can’t carry back any portion of the unused business credit that is attributable to the credit for retention, they may carry forward the unused amounts for up to 20 years.

Act Immediately

Since the benefits are only available to those who qualify for a certain period of 2010, as mentioned above, you have to act fast to maximize the benefit you can get.

Additional Provision

Code Section 179 Expensing

When a company purchases qualified fixed assets (depreciable tangible personal property that is used in the active conduct of a trade or business) during the tax year, it can choose to write off all or a portion of it as a first-year expense or depreciate it over the prescribed lives of the assets.

Old Rule: For tax years that begin in 2010, the maximum amount that could be expensed under Code Section 179 was $134,000, and is reduced by the amount of total qualified assets that exceeded $530,000.

New Rule: For tax years that begin in 2010, the maximum amount that can now be expensed is $250,000, and that maximum is reduced by the amount of total qualified assets that exceed $800,000. (This rule effectively extends the levels that applied for tax years beginning in 2008 and 2009.)

A small business considering purchasing substantial new assets should act now, because this one time deduction could be huge and it will make a difference on your 2010 tax return.