In March, President Barack Obama signed the Hiring Incentives to Restore Employment (HIRE) Act. The HIRE Act contains several tax items, the biggest of which is a payroll tax holiday for employers who hire qualifying workers – someone who has not worked more than 40 hours during the last 60 days. This employer benefit is for qualifying new employees hired after Feb. 3, 2010, and before Jan. 1, 2011, however, only wages paid after March 18, 2010 qualify for the payroll tax holiday.
New HIRE Act Incentives
Some additional features of the new hiring incentive include:
- Immediate benefit. The tax benefit of the new incentive is immediate. It puts money into a business’ cash flow immediately, since the tax is simply not collected in the first place.
- Private sector applicability. The tax benefit generally applies only to private-sector employment, including nonprofit organizations—public sector jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
- No minimum requirements. There is no minimum weekly number of hours that the new employee must work for the employer to be eligible. However, the holiday is capped at the current maximum for the OASDI portion of the FICA tax, or $6,622 for 2010 (6.2 percent x 106,800).
- Pick one credit. For workers that would otherwise be eligible for the Work Opportunity Tax Credit, which is another type of employment tax credit, the employer must elect out of the payroll tax holiday if they want to claim the WOTC. (Generally the WOTC provides a larger credit amount). There is no double-dipping.
- Family doesn’t count. An employer can’t claim the new tax breaks for hiring family members.
- Replacements excluded in most cases. A worker who replaces another employee who performed the same job for the employer isn’t eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
- Employee cooperation needed. In order to confirm their status, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn’t been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
- First quarter exception. The payroll tax holiday doesn’t put money in employers’ pockets until the first payroll tax filing due for the second quarter of 2010. The amount by which the Social Security payroll tax would have been reduced had the payroll tax holiday provision been applied during the first calendar quarter is instead applied against the tax imposed on the employer for the second calendar quarter of 2010.
Other highlights of the legislation include:
- Railroad retirement tax. The Act creates a similar new set of rules allowing a payroll tax holiday for railroad retirement tax purposes.
- $1000 retained worker credit. The HIRE Act provides a credit of up to $1,000 for employers who retain qualifying employees for at least 52 consecutive weeks. The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2 percent of the wages paid by the employer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit isn’t available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).
- Extension of 2009 expensing rules. The bill extends the increased Section 179 deduction through 2010. This amount had been increased to $250,000 for 2009 by the American Recovery and Reinvestment Act. The new law gives a one-year lease on life to enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment, instead of recovering it via depreciation over a number of years. For tax years beginning in 2010, the maximum amount that a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009. Had the HIRE Recovery Act not been passed and signed into law, these dollar limits would have dropped this year to $134,000 and $530,000 respectively.