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On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act. The Act provides tax benefits for businesses to hire and retain new employees.
HIRE is designed to encourage businesses to increase their workforces through two tax breaks: payroll tax savings and an additional one-year tax credit on new hires.
Only qualified employers may take advantage of the tax breaks. These include private employers as well as public higher education; however, federal, state, and local government employers are not included.
Payroll tax savings
Qualified employers will not have to pay the employer portion of the 6.2% Social Security portion of the FICA employment tax. A qualified employee is one who:
- Begins employment after February 3, 2010, and before January 1, 2011.
- Confirms in writing he or she has been unemployed for over 40 hours for at least 60 days. The IRS will create a form that employees can use to document the required statement.
- Is not replacing another employee, unless the other employee voluntarily separated, or was terminated for cause.
- Is unrelated to the employer.
First quarter
In order to give payroll departments and the IRS some time to acclimate to the new law, Congress provided that the payroll tax holiday will not pertain to wages paid in the first calendar quarter of 2010. For wages paid prior to April 1, 2010, the exemption comes in the form of a second quarter credit ( i.e., wages paid before April 1 that would have qualified for the exemption are subject to regular payroll tax rules).
Effective April, 1, 2010, the employer will take the tax break for any new employee’s wage paid immediately into account when making payroll deposits.
Tax credit for retaining new hires
For tax years ending after March 18, 2010, employers may also take a business tax credit for each qualified individual hired after February 3, 2010, and before January 1, 2011 who:
- Was employed on any date during the tax year,
- Was employed for at least 52 consecutive weeks, and
- Receives wages during the last 26 weeks of the 52-week period that are at least 80 percent of his or her wages during the first 26 weeks of the 52-week period.
The credit would be the lesser of 6.2% of wages paid or $1,000 for each employee. Employers may use “Form 941 for 2010” from the IRS. This form is also available in the Forms Library on Prospera.
Claiming the credit
The new law requires that employers get a statement from each eligible new hire, certifying under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked less than a total of 40 hours for anyone during the 60-day period. Employers can use Form W-11 to meet this requirement.
Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.