New employees get big tax break under Hire Act

Miller Nash LLP,
Oregon and Washington Law Firm
Written by Jeffrey P. Chicoine, Madeline Engel

If you start adding employees, do not miss this new tax incentive. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act, sometimes called the HIRE or New Hire Act. Of most immediate significance for employers is an exemption from paying the employer’s share of social security taxes for qualifying new hires. The Act applies to private employers, including nonprofits, and qualifying public universities and colleges.

Specifically, the New Hire Act exempts a qualifying employer from paying the employer’s share of social security taxes for a new hire (1) who “begins employment” after February 3, 2010, and before January 1, 2011, and (2) who certifies that he or she has not worked more than 40 hours in the past 60 days.

This exemption saves the employer from paying its 6.2 percent share of the social security payroll tax for the remainder of 2010. An employer could save up to $6,621 if it hired an unemployed worker and paid that worker in 2010 at least $106,800—the cap on wages subject to social security taxes. The exemption, moreover, contains no cap or limit on the number of new hires that qualify.

The exemption actually starts with the second quarter of 2010. First-quarter payroll taxes on wages subject to the exemption are recouped through an offset to second-quarter payroll taxes. The New Hire Act does not change other payroll taxes, so the employer must continue to deduct the worker’s share of social security taxes and the employer’s and worker’s 1.45 percent Medicare tax.

The New Hire Act also allows an increase in the general business tax credit for an employee (1) who is hired in this same period (after February 3, 2010, and before January 1, 2011), (2) who is continuously employed for 52 weeks, and (3) whose wages during the final 26 weeks are at least 80 percent of his or her wages for the first 26 weeks. The tax credit is the lesser of: (1) $1,000, or (2) 6.2 percent of the wages the employer paid to retain the employee for the 52 weeks.

The New Hire Act also applies to some replacement hires, but only if the replaced employee voluntarily resigned or was terminated for cause. An employer therefore cannot terminate and then rehire its workforce just to take advantage of the tax credit.

Although the Act requires that the employee must certify that he or she has not worked more than 40 hours in the past 60 days, as of the publication of this article, no official form for employee certification has been developed. Miller Nash LLP, however, can provide you with a form of certification to meet the Act’s requirements.

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