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HIRE Act signed - $7K+ tax credit per new employee

– March 18, 2010

The Hiring Incentives to Restore Employment (HIRE) Act offers savings of up to $7,621 per qualified employee hired in 2010.  President Obama signed the HIRE Act on March 18, 2010 which provides tax incentives to employers for hiring unemployed workers and retaining such employees.  It also extends the Section 179 expensing rules through 2010. Below is a summary of the key provisions of this Act.

Payroll Tax Holiday in 2010 for Hiring Unemployed Workers

The Federal Insurance Contributions Act (FICA) imposes two taxes:  the Old Age, Survivors and Disability Insurance (OASDI) tax and the Medicare Hospital Insurance (HI) tax. These taxes are imposed on employers for wages paid and on employees for wages received. The OASDI tax rate is 6.2% on wages up to an annually-adjusted “wage base” ($106,800 for 2010). The HI tax rate is 1.45% on all wages, regardless of amount.

The Act provides qualified employers relief of OASDI taxes when they hire qualified unemployed individuals. The relief applies to wages paid beginning on March 19, 2010 (the day after the enactment date) and ending on December 31, 2010.

A qualified employer is generally defined as any private-sector employer, including nonprofit organizations.  Public sector employers such as federal or state government employers are generally not eligible; however, a public institution of higher education would qualify.

A qualified individual is anyone who:

• begins employment with a qualified employer after February 3, 2010, and before January 1, 2011 (the credit only applies to wages paid after March 18, 2010)
• certifies by signed affidavit, under penalties of perjury, that he hasn't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer
• isn't employed to replace another employee who performed the same job for the employer, unless the prior employee left the job voluntarily or for a cause
• isn't related to the qualified employer in a way that would disqualify him for the “Work Opportunity Tax Credit (WOTC)”

Employers must still pay the applicable OASDI tax for all wages in the first quarter of 2010 and can then claim the credit on the second quarter payroll return.  After the first quarter, employers do not pay the tax for the remainder of 2010.  Additionally, the credit is automatic unless the employer elects out of the credit.  Since a WOTC credit and a HIRE credit cannot be taken on the same employee, you will need to elect out of the HIRE credit in any instances in which the WOTC credit would provide more tax benefit.

Tax Credit for Retained Workers

As an additional incentive, the Act provides for a credit, up to $1,000, for any “retained workers”. A retained worker is defined as any qualified individual, as defined for purposes of the payroll tax holiday (see above), who:

• was employed by the taxpayer on any date during the tax year
• was so employed by the taxpayer for a period of not less than 52 consecutive weeks
• had wages (as defined in Code Sec. 3401(a) ) for that employment during the last 26 weeks of the period (described above) equal to at least 80% of the wages for the first 26 weeks of that period

Since the retained worker must be employed for at least 52 weeks, this credit will be available to calendar year taxpayers in their 2011 income tax returns.

Depreciation Expensing Provisions Extended Through 2010

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.

If you have any questions or would like additional information on how this new legislation may impact you or your business, please contact your Warren Averett advisor.

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