The President’s Fiscal Year 2014 budget proposal is being digested by analysts and economists to understand its potential impact on the economy. Small businesses play an important role in the budget, which features a provision to help stimulate hiring and pay increases for companies with less than $20 million on payroll during 2012.
The budget offers qualifying businesses a one-time 10 percent tax credit on all salaries paid to new hires and pay increases to existing employees. The credit carries a limit of $5 million, which is enough to cover most salary expansion by qualifying companies. For example: If your business decided to hire three new employees at $80,000 each and give $500,000 in raises to your existing 100 employees, this represents a total of $740,000 in new salary and would generate a $74,000 tax credit.
In the past, the administration has attempted to stimulate small-business hiring through payroll tax holidays and credits. These provided lackluster results because, frankly, the value of the benefit is very low compared to the cost of bringing on a new employee. These attempts have only helped companies that planned to hire anyway.
A 10 percent credit is more attractive because it represents a direct dollar-for-dollar reduction in income taxes for a portion of a the new salaries paid. Companies with access to credit at low interest rates could, in effect, borrow money to expand and have the interest costs for the first year or several years (depending on the interest rate) paid for by this tax credit. It's essentially a license to borrow money for free to hire people. You still need an underlying business case to make the hire, but this gives you some lead time to see a return on the new labor.Finance Watch articles.