Hiring People Doesn’t Always Have to Be “Taxing”

By Mark Kingery

With all the hoopla surrounding March Madness (no pun intended) and the new health care legislation, you might not have noticed that the President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010” ,(“HIRE”) which offers tax relief to encourage private-sector employers (including nonprofit organizations) and public higher education institutions (collectively “Employers”) to create new jobs.  So if you are looking for that last little reason to take the risk associated with hiring then read on.

Basically, the new law exempts Employers who hire qualified employees (as discussed below) from having to pay the Employer's 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. An Employer could save a maximum of $6,621 if they paid the employee at least $106,800 (the maximum amount of wages subject to Social Security taxes) by December 31, 2010.  As an added incentive, an Employer is eligible for an additional tax credit of up to $1,000 if they keep the new employee on payroll for a period of at least 52-weeks and if the employee's pay in the second 26-week period is at least 80% of their pay in the first 26-week period.

In order to qualify for tax relief under HIRE, employees must have been hired between Feb. 3, 2010 and January 1, 2011, been unemployed for a period of at least 60 days (the employee will have to sign an affidavit as to this status) and not be a replacement for another employee unless the former employee resigned or was terminated for cause.  In addition, even your kindly Uncle Sam will not allow you to claim the new tax break for hiring certain unrelated dependents, and family members related to a person who owns, directly or indirectly, more than 50% of the value of an entity’s outstanding stock or capital. So, as always, it is generally wise to make sure you like your siblings before you hire them. 

Some additional features of HIRE include:

• There is no minimum weekly number of hours that the new employee must work, nor are there any limitations on the salary of the new employee.  

• For workers that would otherwise be eligible for the Work Opportunity Tax Credit (an employment tax credit discussed below), the Employer must select one benefit or the other for 2010.

• The relief from payroll taxes begins on the later of March 19, 2010 or the date the employee is hired (with any payroll tax savings “earned” during the first calendar quarter reflected as a reduction of payroll taxes owed in the second calendar quarter) and ends on December 31, 2010. So unlike many other tax incentives, HIRE creates immediate tax savings.

Obviously, the savings under HIRE can be substantial, but  in certain circumstances, it might  make sense for an Employer to elect (in the manner that the IRS requires) to forego applying for the payroll tax holiday allowed by HIRE and instead take the Work Opportunity Tax Credit  (“WOTC”). This election, which can be done on an employee-by-employee basis, can result in more value because it is generally 40% of “qualified first-year wages,” up to $6,000 per worker.  As such, and while the WOTC is harder to qualify for than incentives offered by HIRE, it would generally make sense to take the credit for any  employees who make less than $38,700 before December 31, 2010 (assuming the $6,000 deduction).      

Additionally, the $6,000 limit on eligible wages is changed for the following:

• It is increased to $12,000 for qualified veterans.

• It is reduced to $3,000 for qualified summer youth employees on wages paid between May 1 and September 15; and

• If the employee is a long-term family assistance recipient, the credit is increased to a percentage of first- and second-year wages, up to $10,000 per employee. 

The WOTC is generally limited to employees who begin work before Sept. 1, 2011 and are members of one or more of 11 targeted groups (including those mentioned above).  In addition, restrictions under HIRE relative to the hiring of family members generally remain applicable and the credit is not usually available for employees who have previously worked for the Employer.

We’re quite confident that you may be thinking:  this can’t be right because the concept and math seem too simple for Congress to have written and passed these laws.  Well, as you might have guessed from the overuse of the word “generally” in this article, there are certain limitations and exclusions that apply. So to remain in the good graces of our fellow practitioners, we recommend you consult your tax advisor if you believe you might qualify for these incentives.   

About the Author
Mark Kingery, CPA, is a shareholder with Kingery & Crouse, P.A., Certified Public Accountants, located in Tampa, Florida.  Mark has over twenty five years of public accounting experience and manages the accounting and audit departments.   During his tenure in public accounting, Mark has served a wide variety of clients, both public and private.  Kingery & Crouse, P.A. is a full service public accounting firm with a staff of dedicated professionals providing audit (including SEC), tax and accounting services. You may contact Kingery & Crouse at (813) 874-1280 or find us on the web @ www.tampacpa.com.