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Hiring Incentives to Restore Employment Act of 2010

The President recently signed into law the “Hiring Incentives to Restore Employment Act of 2010.”  The idea behind this legislation is to reduce unemployment by encouraging businesses to create jobs by easing their payroll tax burden.  Simply put, if a small business or tax-exempt organization hires a qualified employee during the period beginning February 3, 2010 thru December 31, 2010, they will be exempt from paying the 6.2% social security tax on that employees wages if that individual had been unemployed for at least 60 days prior to being hired.  The employer may also qualify for an up-to-$1,000 credit if they keep the employee for 52 consecutive weeks.
Key Factors:

  • The employee’s 6.2% share of social security tax and the employer and employee’s share of Medicare tax still apply to all wages.
  • The exemption does not apply to household workers, family members, or unrelated dependents of the employer.
  • Employees are considered qualified if they have been employed for less than 40 hours 60 days prior to being hired in the new position. Additionally, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60 days prior to the qualified position.
  • Qualified employees cannot replace existing workers arbitrarily. If a current employee is let go for cause or terminates his or her own employment voluntarily, the new hire qualifies for the tax exemption. If an employee was terminated due to other facts and circumstances, such as the lag in the economy; once business picks up, the exemption can be claimed both for rehiring old workers and hiring new workers.
  • Employees hired after the date of the introduction of the legislation (Feb. 3, 2010) are considered qualified, however, only wages paid after March 18 are considered for the payroll tax exemption.
  • The effect of the new initiative is immediate beginning with the second quarter of 2010.  The tax is not required to be collected so it immediately has a positive impact on a businesses cash flow.  Wages paid during the period beginning March 19 and ending March 31 (1st quarter) are to be claimed on the employer’s Form 941 for the second quarter of 2010.
  • If employer utilizes the tax exemption for a qualified employee, those same wages cannot be taken into account for purposes of the Work Opportunity Tax Credit.  An employer must elect out of the payroll tax exemption with respect to wages paid to that qualified employee to utilize the WOTC.
  • A company could save a maximum per qualified employee of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year.
  • As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for 52 consecutive weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week period is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.
  • There is no minimum weekly number of hours that the new employee must work for the employer to be eligible for the credit or the payroll tax exemption, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.

The incentive isn’t biased towards either low-wage or high-wage workers. Under the initiative, a small business saves 6.2% on both a $30,000 worker and a $100,000 worker.

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