Businesses of all sizes can benefit from two tax breaks passed by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. This act was signed into law on March 18 by President Barack Obama. Its provisions — the Payroll Tax Exemption (the “exemption”) and the New Hire Retention Credit (the “credit”) — are available to most U.S. employers and differ from the Work Opportunity Tax Credits that have been in place since the 1990s.
The exemption provides qualified employers with savings of the 6.2 percent Social Security portion of an employer’s employment tax liability on the wages of qualified employees. However, the exemption does not apply to the 1.45 percent portion (the so-called Medicare tax) of an employer’s employment tax liability.
The credit, in contrast, is an offset against a qualified employer’s income tax liability. The total credit amount per employee is equal to whichever is less — 6.2 percent of wages paid to a qualified employee over 52 weeks, or $1,000. If an employer is otherwise qualified, it can get the benefit of the exemption and the credit relative to the same qualified employee.
“The definition of qualified employee and employer are the same under each tax savings opportunity,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “While each tax savings employs a 6.2 percent rate of wages in its calculation, the manner of determining the savings and realizing its associated benefit differs.”
Smart Business spoke with McGrail about the exemption and the credit, and about how employers and employees can take advantage of them.
What is the time frame to qualify for the tax savings?
The exemption applies to wages paid to a qualified employee at any time during calendar year 2010, so it is available through the end of 2010. The credit, on the other hand, applies to wages that span a 52-week period for any qualified hire from Feb. 4, 2010, through Dec. 31, 2010. So, at the latest, it could apply to wages paid through December 2011.
Which employers qualify for the exemption and/or credit?
Generally, any U. S. business entity subject to employment tax qualifies. Taxable businesses and tax-exempt organizations qualify, and employers in U.S. territories that are subject to federal Social Security tax also qualify. Public colleges and universities can qualify for the exemption, but federal, state and local government employers generally do not qualify, nor do household employers.
The credit is a general business credit to encourage retention of new hires, so any taxpayers that can make use of federal business income tax credits can claim the credit as long as the wages and employees otherwise qualify.
The credit may not offset alternative minimum tax and may not be carried back to taxable years prior to 2010.
