Business Changes in HIRE Act

By: Labry Welty
Tax Update
March 30, 2010

On March 18, 2010, the President signed into law the Hiring Incentives to Restore Employment (HIRE) Act of 2010. The centerpiece of the HIRE Act is a payroll tax holiday and an up to $1,000 tax credit for businesses that hire unemployed workers. In addition to these new hiring incentives, the HIRE Act also includes a one year extension of the enhanced small business expensing option under Code Sec. 179. Both of these provisions are extremely important to many businesses.

Below is an overview of the two key tax changes affecting business in the HIRE Act.

Payroll tax holiday and up to $1,000 credit for employers who hire unemployed workers. In an attempt to stimulate the hiring of workers by the private sector, the HIRE Act exempts any private sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer's 6.2 percent share of the Social Security payroll tax on that employee for the remainder of 2010. As such, an employer potentially can save a maximum of $6,621 in Social Security payroll tax if it hires an unemployed worker and pays 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 its payroll for a continuous 52 weeks, the employer may be eligible for an additional non-refundable tax credit of up to $1,000 after the 52 week threshold is reached. Such credits must be taken on the employer's 2011 federal income tax return. In order to be eligible for the credit, the employee's pay in the second 26 week period must be at least 80 percent of the pay in the first 26 week period.

Workers hired after February 3, 2010, the date of introduction of the legislation, are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18, 2010 receive the payroll tax exemption. Some additional features of the new hiring incentive include:

The tax benefit of the new incentive is immediate. It puts money into a business' cash flow immediately, since the tax is simply not applied.
Public sector jobs are generally not eligible for either benefit.
There is no minimum weekly number of hours that the new employee must work for the employer to be eligible and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
For workers that would otherwise be eligible for the Work Opportunity Tax Credit (for example, another type of employment tax credit), the employer must select one benefit or the other for 2010.
Family members are not qualifying workers.
A worker who replaces another employee who performed the same job for the employer isn't eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
In order to qualify for the payroll tax holiday, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn't been employed for more than 40 hours during the 60 day period ending on the date the employment begins.
The incentive applies to both low-wage and high-wage workers.
The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2 percent of the wages paid by the taxpayer to the retained worker during the 52 consecutive week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker's wages during the 52 consecutive week period exceed $16,129.03.

Extension of enhanced small business expensing. The HIRE Act also extends, for one year, enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment instead of depreciation over a number of years. For tax years beginning in 2010, the maximum amount a business may expense is $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing eligible assets.