Tax Tip of the Week- New Tax Break for Hiring Unemployed

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Interview Finally, congress passes a law designed to stimulate hiring! Just a couple of years later then they should have. Amazing how mid-term elections get the politicians moving to try cutting taxes in order to stimulate hiring. The new Hiring Incentives to Restore Employment Act (HIRE) Act of 2010 provides a couple of key payroll tax breaks for employers that hire new employees. The following analysis is from the May 2010 Small Business Tax Strategies newsletter:

Tax break #1: Skip a payroll tax liability

Normally, an employer must pay the 6.2% Social Security tax portion of the FICA tax on an employee’s wages up to a specified annual amount ($106,800 for 2010). The employer’s 1.45% Medicare tax portion of the FICA tax applies to all wages.

But the new law waives the employer’s Social Security tax bill on wages paid to qualified employees for employment between March 19, 2010 and December 31, 2010. A qualified employee is one who:

· Starts work for your company after Feb 3, 2010, and before Jan. 1,2011

· Has not been employed for more than 40 hours during the previous 60 days

· Was not hired to replace another employee (unless the former employee separated from employment voluntarily or was discharged for cause)

· Is not related to the employer

· Does not own, either directly or indirectly, more than 50% of the company

A qualified employee may work for any number of hours on a part-time or full-time basis.

Example: Your Company hires an unemployed worker on a part-time trial basis on May 10. On July 1, it promotes the employee to a salaried position. For the period spanning May 10 through December 31, the employee receives $30,000 in wages. Result: Your Company saves $1,860 (6.2% Of $30,000) in Social Security tax in 2010.

The Social Security tax exemption on qualified wages paid in March will show up as a credit on the employer’s second quarter federal employment tax return (Form 941). For qualified wages paid after March, you can take this tax break into account when making your regular payroll tax deposits.

Note that the new tax break has no effect on the employee’s 6.2% share of Social Security tax. Employers must still withhold the full 6.2% on wages up to $106,800 for 2010.

Also, the Social security tax exemption break must be coordinated with the Work Opportunity Tax Credit (WOTC) for hiring workers from certain disadvantaged groups. You can’t claim the Social Security tax exemption for wages used to claim the WOTC.

New employee Tax break #2: Retain workers for credits

In addition to the Social Security tax exemption for hiring qualified employees, you can secure a tax credit for keeping theses workers employed for at least 52 consecutive weeks. Each credit, which is added to the general business credit, equals the lesser of $1,000 or 6.2% of the wages paid to the worker during the 52-week period. This prevents employers from maxing out on $1,000 credits for employees who work only minimally.

Example: Your Company hires an unemployed worker on May 10. The worker receives $5,000 in wages for the period spanning May 10, 2010 through May 9, 2011. Therefore, your company’s credit for worker is limited to $310 (6.2% of $5,000).

To further discourage abuse, the new law requires that wages paid to the qualified employee during the last 26 weeks of the 52-week period must equal at least 80% of the wages paid during the first 26 weeks of the 52-week period.

Will this work? Well, if history is any guide – only partially. Studies have shown that about 75% of the people who took advantage of the $8,000 new home credit and the “Cash for Clunkers” rebate went to people who were planning on making purchases in the near term anyway. In other words, these targeted credits did little to help the economy and reduce unemployment.

If you are planning on hiring and you happen to find a “Qualified Employee” who fits your needs, then this is a great deal for you. Since the credit is much lower than the cost of screening, hiring and training a new employee, it is highly unlikely that the new HIRE credits will trigger “new” jobs.