HR professionals responsible for hiring decisions should be aware of the tax incentives provided by the Hiring Incentives to Restore Employment (HIRE) Act, according to Hal Coxson, an attorney with Ogletree Deakins in Washington, D.C. President Barack Obama signed the Hire Act on March 18, 2010, to provide tax relief to businesses that hire unemployed workers.
The HIRE Act essentially is a vehicle that Congress enacted to encourage employers to bring the unemployed into the workforce, Allan Friedland, an attorney with Jackson Lewis in Hartford, Conn., told SHRM Online.
By taking advantage of the HIRE Act’s tax incentives, “HR professionals can be a hero,” remarked Mark Sieke, an attorney with Mitchell Silberberg & Knupp in Los Angeles. The law “should increase the current cash flow of businesses making qualifying hires. Time will tell whether the tax benefits actually will stimulate employment.” He recommended that HR “take these subsidies into account when evaluating the economics of determining whether to hire.”
The tax incentives “should be of interest to all HR professionals because it is a way for HR to contribute to the organization’s bottom line,” remarked Brandon Edwards, president of Tax Credit Co. in Los Angeles. He told SHRM Online that “benefits will range from $10,000 for a company hiring 20 people in 2010 to over $1 million for many midsize and large companies that are hiring thousands. Unlike other tax incentive programs that only apply to for-profit companies, the tax exemption applies to private, nonprofit organizations as well as public universities.”
It will be “up to HR and payroll to put the statutory provisions into operation,” Friedland noted. First, HR will need to determine whether new hires are qualified for HIRE Act relief.
ELIGIBILITY FOR PAYROLL TAX EXEMPTION
The new law grants employers an exemption for their 6.2 percent Social Security—Federal Insurance Contributions Act (FICA)—payroll contribution for every new employee hired after Feb. 3, 2010, and before Jan. 1, 2011, up to the FICA wage cap of $106,800, Coxson explained. The payroll tax exemption does not apply to wages paid to an employee who is hired to replace an existing worker, unless the existing worker terminated employment voluntarily or was terminated for cause, he added.
This rule is “intended to prevent employers from terminating solely for the purpose of obtaining the availability of the tax credit,” Friedland remarked in a May 20, 2010, interview. “It’s more an anti-abuse rule than anything else.”
If an employer lays an employee off because of lack of work and later, when work picks up, hires a new employee, the payroll tax exemption applies to wages paid to the new employee as long as the new employee is a “qualified” employee (i.e., was employed less than 40 hours during the prior 60 days). Family members and other relatives do not qualify, and household employers cannot claim this new tax benefit, Coxson noted.
According to the Internal Revenue Service (IRS), the payment tax exemption is claimed on Form 941 (Employer’s Quarterly Federal Tax Return) beginning with the second quarter of 2010. “If the benefit is not claimed on a quarterly return, it is recommended to file a revised return for that quarter, claiming the benefit, rather than a make-up on the next quarter’s return,” according to Sieke.
There are new questions on line six asking for the number of employees, the wages earned by each employee and then a calculation of 0.062 times wages to determine the amount that does not have to be paid to the IRS, said Karen Field, principal with KPMG LLP’s Washington, D.C., national tax practice. She noted that the Form 941 does allow for adjustments during the year for an amount missed in a previous quarter but said that in certain instances an employer should use a Form 941X to correct previous quarters.
Coxson said that employers still may claim the COBRA premium assistance credit and the payroll tax exemption for the new hire on the same employment tax return. And an employer that wishes to claim the Work Opportunity Tax Credit with respect to a qualified employee may elect out of the payroll tax exemption for wages paid to that qualified employee.
The exemption will be applied to wages starting on March 19, 2010, he noted, but federal, state and local government employers other than public colleges and universities are not eligible for the exemption. Payroll taxes for the first quarter of 2010 will be treated as an advance payment of taxes owed for the second quarter of the year.
An employer may claim the payroll tax exemption after an eligible or “qualified” employee certifies in a signed affidavit, such as Form W-11, affirming the employee’s previous unemployed status, Coxson added. In order for the employer to take the payroll tax exemption, the newly hired employee must begin employment with the employer after Feb. 3, 2010, and before Jan. 1, 2011, and must have either been unemployed for at least 60 days prior to being hired or to have worked for fewer than 40 hours for another employer during the previous 60 days.
The employee certifies under penalty of perjury on the affidavit form, Friedland noted. “The employer does not have to determine if the employee in fact meets the out-of-work requirement,” he added.
But HR really needs to “get the paperwork in order and keep copies of the Forms W-11,” Field said. “Also, it is a good idea to keep other information that supports the fact that the employee was not working for the previous period, if any exists,” she remarked.
NEW-HIRE RETENTION CREDIT
Under the HIRE Act, employers receive a general business income tax break if the employer continues to employ the new hire for a continuous period of at least 52 weeks, Coxson explained. To qualify, the wages paid to the employee during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks. This requirement prevents an employer from retaining an employee with minimal pay just to obtain the credit, Sieke noted.
The tax break is the lesser of $1,000 or 6.2 percent of wages paid to the new employee during the 52-week period. The tax reduction is to be taken on the employer’s income tax and, Coxson pointed out, the credit cannot be carried back but may be carried forward.
So for an employer to claim the full $1,000 retention tax credit, it must pay a new hire at least $16,129 during a 52-week period, Sieke remarked.
TAX INCENTIVES AVAILABLE FOR A LIMITED TIME
HR should remind managers and employees that the HIRE Act tax incentives last only for new hires before Jan. 1, 2011, Coxson noted. So, employers must act quickly to qualify for its benefits.
“Most employees have been enthusiastic about participating in the screening process for the HIRE Act, especially if they are educated properly on the program and its purpose,” Edwards added. “HR professionals should take the time to learn about the program and communicate the rules and screening process effectively to stakeholders in the hiring process.”
Allen Smith, J.D., is SHRM’s manager of workplace law content.
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