“HIRE” Act Provides Incentive Benefits to Small Business Employers

“HIRE” Act Provides Incentive Benefits to Small Business Employers
From the July 2010 Riker Danzig Tax and Trusts & Estates UPDATE

Background. On March 18 of this year, President Obama signed into law the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147). The HIRE Act was intended to encourage the hiring and retention of American workers by extending an "employer tax holiday" to employers hiring unemployed workers during 2010, and by granting an up-to-$1,000 per employee tax credit for keeping such newly hired workers on the payroll for at least one year.

Tax Holiday. The HIRE Act provides relief to employers from paying the 6.2% share of the Social Security taxes which employers are generally required to pay in respect of employee wages. Normally, employers paying wages to employees are responsible for paying payroll (FICA) taxes with respect to those wages, at a rate equal to 7.45% of the wages paid. FICA is made up of two components: Old Age, Survivors and Disability Insurance (OASDI) tax and a Medicare Hospital Insurance (HI) tax. The OASDI tax rate is 6.2% on wages paid, up to an annually-adjusted "wage base," which is $106,800 for 2010. The HI tax rate is 1.45% on all wages and is not subject to a cap. The employer's obligations to pay both components of the FICA tax is matched by a corresponding tax (subject to the same OASDI cap) imposed on the employee, which is collected by the employer through wage withholdings.

The HIRE Act provides relief from the employer’s share of OASDI taxes for employers that hire unemployed workers. The relief applies to wages paid to "qualified individuals" (workers hired between March 19, 2010, and December 31, 2010, who were substantially unemployed for at least 60 days prior to their hire date, who are not hired to replace another worker and who are not "related" to the employer) beginning on March 19, 2010, and ending on December 31, 2010. The relief only applies to the OASDI portion of the employer's payroll tax liability, which effectively means that the maximum amount of tax relief available to any employer cannot exceed $6,621.60 per employee. The newly hired employee need not be full-time in order for the employer to enjoy the tax holiday.

Tax Credit. In addition to the tax holiday, the HIRE Act grants to an employer a tax credit in respect of certain of its employees. For any tax year after March 18, 2010, the HIRE Act provides employers up to $1,000 in tax credits for each "retained worker." A retained worker is any qualified individual who meets the following criteria: (1) he or she must have been employed by the employer on any date during such tax year, (2) was so employed for a period of not less than 52 weeks, and (3) whose wages during the second half of such 52-week period were at least 80% of the wages paid during the first half of such period. The amount of the tax credit is determined by reference to the lesser of: (1) $1,000, or (2) 6.2% of the wages paid by the employer to the retained worker during the 52-week period.