The national unemployment rate in February 2010 remained at 9.7 percent, with the rate considerably higher in certain parts of the country. If your business has been growing but you've been reluctant to take on a new employee because of economic uncertainty or for any other reason, maybe recently enacted tax incentives will convince you to act. The Hiring Incentives to Restore Employment (HIRE) Act, which was signed into law on March 18, 2010, offers significant tax savings for adding people to your payroll.
Payroll Tax Forgiveness
If you hire an "eligible worker" now through the end of this year, you'll qualify for a waiver of Social Security taxes on their pay. This is a savings to you of 6.2 percent on wages up to $106,800 for the year, or a maximum of $6,621 per eligible new hire.
Eligible workers. This includes anyone who begins work with you after February 3, 2010, and before January 1, 2011, and who has been unemployed for at least 60 days before the date the employee begins working for you. The new worker can't displace a current worker unless that worker separated from service voluntarily or for cause. The payroll forgiveness does not apply to a worker who is related to the employer or who owns more than 50 percent of the business.
The new employee can be a full-time or part-time worker; there is no minimum number of hours to make the employee an eligible worker. The worker must certify to you that he or she has not been employed for more than 40 hours during the previous 60 days. The "new" employee can be a former employee who was laid off as long as the unemployment time has been met.
Coordination with the Work Opportunity Tax Credit (WOTC). Employers who hire certain disadvantaged workers can obtain a tax credit. In most cases, the credit is 40 percent of the first $6,000 of wages, or $2,400. There is no limit on the number of workers that create a credit for you. If you want to claim the WOTC, you'll have to make an election not to have the payroll tax forgiveness apply.
Mechanics of payroll tax forgiveness. For wages paid on April 1 or later, you simply do not include what would have been required employer contributions for Social Security taxes when you make your payroll deposits. For wages before this date, employers can claim a credit for Social Security taxes by reducing their tax deposits for the second quarter.
Impact on employees. New employees have a job; they don't receive any tax breaks which instead go to employers. However, they don't lose out on the employer share of Social Security taxes paid on their behalf because the federal government will make appropriate transfers to Social Security to cover the payroll tax forgiveness.
Retained Worker Credit
Adding a new worker to your payroll not only frees you from Social Security taxes, you also qualify for a tax credit if you keep them on the payroll for at least 52 consecutive weeks. The credit is the lesser of $1,000 or 62 percent of wages paid during the 52-week period. In effect, any new employee who earns more than $16,130 during the 52-week period would entitle you to a full $1,000 tax credit.
Because a new worker needs to work for a year, the credit won't be claimed until you file your 2011 return; the credit won't reduce your 2010 tax bill. If a new worker voluntarily leaves the job before the end of the 52-week period, you won't be eligible for the credit.
There is no limit on the number of new employees you can hire and for which you can claim these tax breaks.
Tax breaks are helpful, but they certainly don't offset all of the costs of taking on a new employee. In addition to wages of a new employee, you'll still have to pay the employer share of Medicare taxes as well as workers' compensation, unemployment insurance, and any employee benefits offered by your company. Consider the net cost of a new employee before making a decision to hire.
Barbara Weltman is an attorney, prolific author with such titles as J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® at www.barbaraweltman.com and host of Build Your Business radio. Follow her on Twitter @BarbaraWeltman.