Significant Hiring Incentive Bill to be Signed by President Obama

An $18 billion job creation package, the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847), is headed to the White House for President Obama's expected signature.  The bill contains two tax incentives for hiring unemployed workers and it also extends the current Section 179 expensing election.

HIRING/RETENTION TAX INCENTIVES

The "Hire Now Tax Cut" combines payroll forgiveness for Social Security taxes paid on qualified new hires, along with a tax credit for then keeping them on the payroll for at least 52 consecutive weeks.

Payroll Tax Forgiveness

Under the HIRE Act, a qualified employer's 6.2 percent OASDI Social Security tax liability is lifted for wages paid on previously unemployed new hires for any 2010 period starting after enactment through December 31, 2010. A "qualified employee" must start work anytime after February 3, 2010 and before January 1, 2011, and generally must have been unemployed for at least 60 days before his or her start date.

Qualified employers. The U.S., any state or political subdivision thereof, or any instrumentality of the U.S., state or political subdivision thereof, except for state colleges and universities, are not qualified employers for purposes of the payroll tax forgiveness provision. Qualified employers may elect to opt out of payroll tax forgiveness.

Qualified employees. A qualified individual may be hired for any number of hours, full-time or part-time, since the benefits to the employer are tied only to 6.2 percent of any salary paid. No minimum or maximum number of hours is required, although some coordination with employees with multiple jobs is required since prior unemployment must be shown. The qualified individual must certify that he or she was not employed for more than 40 hours during the prior 60-day period and, therefore, satisfies the criteria in the HIRE Act.

According to the Joint Committee on Taxation, an employer may qualify for the incentive by rehiring workers who had previously been laid off. For example, an employer may qualify for the incentive with respect to wages paid when a closed factory reopens a year later or a second shift is reinstated.

Payout mechanics

Although the 6.2 percent OASDI tax forgiveness relates to salaries paid for work performed starting immediately after the President signs the HIRE Act, an employer will not see cash savings on this forgiveness until the beginning of the second calendar quarter of 2010. To allow payroll departments and the IRS a few weeks to get direct OASDI forgiveness up and running, Congress provided that the payroll tax holiday will not apply to wages paid during the first calendar quarter of 2010. Instead, whatever tax holiday amount would have been allowed for the first quarter of 2010 will instead be credited against the employer's general OASDI liability for the second quarter of 2010. Beginning for any new-hire wages paid on or after April 1, an employer takes direct OASDI forgiveness into account when depositing payroll taxes under the regular deposit rule applicable to that employer.

Retained Worker Business Credit

Employers that hire new workers who qualify for payroll tax forgiveness and keep them on the payroll for at least 52 consecutive weeks may be eligible for a tax credit for each of those qualifying employees. This new retention incentive is provided by way of the current year's Code Sec. 38(b) business tax credit, which is increased, with respect to each qualified retained worker, by the lesser of:
    -  $1,000 or
    -  6.2 percent of wages paid by the taxpayer to the qualified retained worker during a 52-consecutive week period.

The "6.2 percent of wages paid by the taxpayer" language was added to the HIRE Act to prevent qualification for the full $1,000 credit for only minimal part-time work. Based upon the 6.2 percent cap, any newly-hired employee who earns more than $16,129 during the 52 consecutive-week period would qualify his or her employer for the full $1,000 retained worker credit.

To prevent further manipulation of the credit, a "qualified retained worker" must be paid an amount equal to at least 80 percent of his first 26 weeks of wages during the last 26 weeks of the 52 consecutive week qualifying period. The law also excludes wages earned by a domestic worker or an individual eligible for the foreign earned income exclusion.

The retained worker business credit generally would be taken on the employer's 2011 income tax return because of the 52 consecutive-week prerequisite. To prevent any retroactive benefit, the HIRE Act disallows carrying back any portion of the unused Code Sec. 38 business credit attributable to the provisions for retained workers.

The new hire must stay on the job for at least the 52 consecutive-week period to entitle his or her employer to the retained worker business credit. For example, if the new hire voluntarily leaves after 50 consecutive weeks for a better job, the employer is not entitled to any portion of the credit for that employee.

CODE SEC. 179 EXPENSING

For 2009, the maximum Code Sec. 179 deduction was $250,000, and the phase-out limit for qualifying property purchased during the year began at $800,000.  First introduced in 2008, enhanced Code Sec. 179 expensing expired on December 31, 2009. Without legislation, Code Sec. 179 expensing for 2010 is limited to $125,000, with a $500,000 cap (both adjusted for inflation). The HIRE Act extends enhanced Code Sec. 179 expensing, at the $250,000/$800,000 threshold levels, through December 31, 2010.

Congress is also reconciling an "Extender Bill" that will extend many temporary tax incentives.  These incentives include:
    -  Research and development tax credits
    -  Enhanced depreciation for various types of assets
    -  Tax-free distribution from IRA's for charity
    -  New market tax credits

If you have any questions regarding the HIRE Act or the pending extender bill, please feel free to give us a call at 260-422-2551.