Take Advantage of 2 New Tax Breaks for Hiring Previously Unemployed People

April 7, 2010 -- Employers can take advantage of two new tax incentives for hiring and retaining certain people who haven’t worked in the past 60 days.

The benefits are part of the Hiring Incentives to Restore Employment Act. President Obama signed the HIRE Act into law March 18. Here’s how you can use the incentives when you hire qualified new employees:

• Get a break from the 6.2 percent payroll tax. Under the HIRE Act, businesses are exempt through year-end from paying their 6.2 percent share of Social Security taxes on qualified employees’ wages. Here’s the fine print:

• The payroll tax exemption applies to qualified employees hired between Feb. 3, 2010, and Jan. 1, 2011. It applies to those employees’ wages from March 19 through Dec. 31, 2010. The tax incentive is capped at $6,622 per employee (6.2 percent of wages up to the maximum taxable Social Security wage base of $106,800).
• Newly hired employees must sign affidavits certifying they hadn’t worked for more than 40 hours in the 60-day period ending on the day they start work. The IRS today released the final version of a sample affidavit, Form W-11, HIRE Act Affidavit.
• Employers claim the exemption when they file their quarterly Form 941, Employer’s Quarterly Federal Tax Return. Employers can begin to claim the exemption on the Form 941 filed for the second quarter of 2010. The IRS has issued a draft revised Form 941 to reflect the new payroll tax incentive.
• The employee continues to pay his or her 6.2 percent share of the Social Security tax, and both employers and employees pay the 1.45 percent Medicare tax on all wages.
• Other restrictions apply. For example, new employees mustn’t be related to the employer. Also, the employer must certify that the new hire isn’t replacing another employee unless that employee separated voluntarily or for cause.

Check the IRS's HIRE Act: Questions & Answers for Employers for details.

• Get up to $1,000 for retaining those employees. If an employer continues to employ one of the above-described people for at least 52 consecutive weeks, the business also can receive an employee retention credit of up to $1,000.

Businesses claim the credit on their 2011 tax returns. The credit is worth $1,000 or 6.2 percent of an employee’s wages over 52 weeks, whichever is lower.

The employee retention credit follows the rules that apply to all general business credits under Section 38 of the Internal Revenue Code. The only exception is that any excess business credit resulting from the employee retention credit can’t be carried back. It can, however, be carried forward.

Note: Employers who claim the Work Opportunity Tax Credit when they hire certain employees from disadvantaged groups can claim either the HIRE provisions or the WOTC, but not both. Individual companies should compare the tax benefits associated with the WOTC (which offers a maximum annual benefit of $2,400 per worker) and the two HIRE provisions, to determine which provides the better tax benefit.

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