HIRE Act Provides New Tax Incentives

April 8th, 2010 | By

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (“HIRE”) Act.  This Act contains two new tax benefits that are available to employers who hire certain previously unemployed workers (“qualified employees”).  The IRS has issued some preliminary guidance on the application of this new law.  We expect further guidance from the IRS on the interpretation of this law as issues and questions arise in the future.

The following summary is based on our review of the relevant provisions of the HIRE Act and the IRS’s preliminary guidance:

1.            Employers -

               Taxable and tax-exempt employers are eligible for these tax benefits if they hire “qualified employees ” and meet the other requirements of the HIRE Act.  Public employers, with the exception of public colleges and universities, are not eligible for these tax benefits.

2.         ”Qualified Employees”  -

               a.)        In order to qualify for the tax benefits under the Hire Act, an employer must hire an employee (after February 3, 2010 and before January 1, 2011) who has been unemployed or employed for less then 40 hours during the 60 day period ending on the date that the new employment begins. 

            b.)        Family members and certain employees related to the employer do not qualify. 

            c.)        A qualified employee must sign a sworn affidavit stating that they meet the qualification with respect to the 60 day period.   The IRS has prepared an affidavit form [form W-11] to be used for this purpose.  This form is to be retained by the employer and not filed with the IRS.

            d.)        The payroll tax exemption benefit does not apply to an employee hired to replace an existing worker, unless the existing worker terminated employment voluntarily or was terminated for cause.  [Note: special rules may apply to employees hired to replace laid off employees].

3.         Payroll Tax Exemption –

            a.)        An employer who hires a “qualified employee” during the relevant time period will be entitled to a Payroll Tax Exemption (“PTE”) on all wages paid to that “qualified employee.”  The PTE is an exemption from the employer’s 6.2% share of social security taxes on all wages paid to the “qualified employee(s)” from March 19, 2010 through December 31, 2010,

            b.)        The PTE does not apply to Medicare tax or any other tax withholdings.  It also will not impact on the amount of social security benefit that the “qualified employee” may eventually be entitled to receive.

            c.)        The IRS is developing forms and guidance with respect to how to handle the PTE for the first calendar quarter of 2010, which will allow appropriate credit to be taken when the employer pays taxes due for the second calendar quarter of 2010.

4.         Business Retention Tax Credit Benefit –

            a.)        There is also a general business tax credit for qualified employers to retain new hires.  An employer may claim this credit for each “qualified employee” it hires for purposes of the PTE and who remains an employee for 52 consecutive weeks (a “retained worker”).  The “retained worker’s” pay may not significantly decrease during the second half of the 52 week period.

            b.)        The Business Retention Tax Credit (“BRTC”) is the lesser of $1,000 or 6.2% of the wages paid to the retained worker during the 52 week period.

            c.)        Caveat:  Employers who are eligible for the more generous Work Opportunity Tax Credit (“WOTC”) must opt out of HIRE if they want to continue receiving the WOTC credit.

 Note:  The preceding summary highlights the key portions of this new law.  However, specific situations and questions should be referred to legal counsel and tax advisors, rather then relying on this general summary.  Additionally, the IRS will be issuing further guidance and forms which need to be taken into account with respect to the application of the provisions of this new law.

IRS Tax Advice Compliance Disclosure: To ensure compliance with the regulations governing the issuance of advice on Federal tax issues, we advise you that any tax advice in this communication (and any attachments) is not written with the intent that it be used, and cannot be used, to avoid penalties that may be imposed under the Internal Revenue Code