HIRE Act Encourages Hiring the Unemployed

By Robert Steere, Toolkit Staff Writer

Employers have a new opportunity in 2010 to save tax dollars as they hire new staff from among the unemployed. Congress enacted and President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act, a legislative package priced at $18 billion that includes new tax breaks for employers that hire persons who have been unemployed for more than 60 days.

The two tax breaks for hiring include forgiveness of certain payroll tax obligations for 2010 and an additional general business credit of up to $1,000 per qualified employee for 2011. The new law also extends through 2010 the enhanced $250,000 allowance for first-year expensing of depreciable business property placed in service during the year.

The president hailed bipartisan passage of the bill, noting that he hoped it would be the first of a series of jobs packages. He applauded the hiring tax incentives and tax cuts to encourage business investment.

Tax Breaks for Hiring the Unemployed

Employers who hire unemployed workers at any time during 2010 after February 3 may qualify for an exemption from the 6.2 percent employer-portion of the Social Security tax typically incurred on payroll. The exemption applies to wages paid to any qualified employee hired after the enactment date of the HIRE Act--March 17, 2010. The maximum value of this tax relief per qualified employee is $6,621 (equivalent to 6.2 percent of $106,800, the wage cap for Social Security tax). Of course, the earlier in the year a qualified employee is hired, the larger the employer's tax benefit is likely to be.

Employers still must pay the 1.45 percent employer-portion of the Medicare tax related to these wages. Also, the employee's 6.2-percent share of Social Security tax and 1.45 percent share of the Medicare tax still must be withheld and paid by the employer. The elimination of the employer-portion of the Social Security tax payment obligation will have no effect on an employee's future Social Security benefits.

During the HIRE Act signing ceremony, President Obama said, "This tax cut says to employers: if you hire a worker who's unemployed, you won't have to pay payroll taxes on that worker for the rest of the year. And businesses that move quickly to hire today will get a bigger tax credit than businesses that wait until later this year."

In addition to the exemption from payroll tax for 2010, employers can claim a second tax benefit in 2011--an additional general business tax credit of up to $1,000 for any qualified employee hired in 2010 and retained for at least one full year.

A price tag of $13 billion has been attached to these tax breaks for hiring. "These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead," said IRS Commissioner Doug Shulman.

Essentially, any non-governmental employer (except for a household employer) in the U.S. can be a qualified employer for the purpose of claiming the new tax benefits. A qualified employee is one hired in 2010 after February 3 who was not employed for more than 40 hours during the 60-day period leading up to the date of employment. In fact, the new law allows the tax benefits only if the employer obtains a statement from each qualifyied employee certifying that he or she was unemployed or worked fewer than 40 hours for someone else during the 60-day period prior to employment. The IRS is currently developing a standardized form for this purpose.

Employers who are adding positions to their payrolls in 2010 will find the tax benefits especially accessible. Rules to qualify for the tax break are stricter when hiring new employees to fill existing positions that current employees have vacated. The new employee does not qualify for the tax benefits if he or she displaces a current employee, unless the current employee left voluntarily or was terminated for cause. Also, family members and others too closely related to an employer do not qualify.

Employers will claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive, including any incentive related to first quarter wages, on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on the IRS website in the weeks ahead.

Section 179 First-Year Expensing

The HIRE Act extends through 2010 authorization for up to $250,000 Section 179 first-year expensing on depreciable business property in the first year it is placed in service. The cap was scheduled to drop to $134,000 for 2010. It also maintains the $800,000 cost-of-equipment limit (the phase-out limit) through 2010, avoiding the scheduled reduction down to $530,000. Thus, small businesses that purchase depreciable business property in 2010 can deduct substantially larger amounts of the cost currently instead of depreciating it over several years. There's a $1 billion price tag for the year this tax break is extended, though most of the revenue loss is made up in later years.

President Obama commented, as he signed the act into law, that this provision "encourages small businesses to grow and to hire by permitting them to write off investments they make in equipment this year. These kinds of expenses typically take years to depreciate, but under this law, businesses will be able to invest up to $250,000, let's say, in a piece of factory equipment, and write it off right away. Put simply, we'll give businesses an incentive to invest in their own future--and to do it today."

Be aware that, without further legislative action, the first-year expensing cap drops dramatically to $25,000 in 2011, and the phase-out limit drops to $200,000.

Posted April 6, 2010.