2010 HIRE Act – Small Business Health Care Tax Credit, Payroll Tax Incentive and Business Credit For Employers Hiring and Retaining Unemployed Workers

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[Updated with New IRS provisions] The IRS has released more details on tax-saving opportunities included in recently enacted HIRE act federal legislation (see details in previous update below). A variety of business tax deductions and credits were created, extended and expanded by the American Recovery and Reinvestment Act of 2009 (ARRA), this year’s Hiring Incentives to Restore Employment (HIRE) Act and the Affordable Care Act. Because some of these changes are only available this year, eligible businesses only have a few months to take action and save on their taxes.  Here is a rundown of some of the key provisions.

An extension of the HIRE act and doubling of benefits is being proposed in the s3706, Americans Want to Work Act

Small Business Health Care Tax Credit

Created under the Affordable Care Act, this credit is designed to encourage small employers to offer health insurance coverage for the first time or maintain coverage they already have. The credit takes effect this year and is generally available to small employers that pay at least half the cost of single coverage for their employees in 2010. The credit is specifically targeted to help small employers that primarily employ low- and moderate-income workers.

The Internal Revenue Service has released a draft version of form 8941 that small businesses and tax-exempt organizations will use to calculate the small business health care tax credit when they file income tax returns next year. The IRS also announced how eligible tax-exempt organizations – which do not generally file income tax returns – will claim the credit during the 2011 filing season.

Both small businesses and tax-exempt organizations will use form 8941 to calculate the credit. A small business will then include the amount of the credit as part of the general business credit on its income tax return. The final version of Form 8941 and its instructions will be available later this year.

Tax-exempt organizations will instead claim the small business health care tax credit on a revised Form 990-T. The Form 990-T is currently used by tax-exempt organizations to report and pay the tax on unrelated business income. Form 990-T will be revised for the 2011 filing season to enable eligible tax-exempt organizations –– even those that owe no tax on unrelated business income –– also to claim the small business health care tax credit.

In 2010, the credit is generally available to small employers that contribute an amount equivalent to at least half the cost of single coverage towards buying health insurance for their employees. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ moderate- and lower-income workers.

For tax years 2010 to 2013, the maximum credit is 35 percent of premiums paid by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. Beginning in 2014, the maximum tax credit will go up to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible, tax-exempt organizations for two years. The maximum credit goes to smaller employers, those with 10 or fewer full-time equivalent (FTE) employees, paying annual average wages of $25,000 or less.

The credit is completely phased out for employers that have 25 FTEs or more or that pay average wages of $50,000 per year or more. Because the eligibility rules are based in part on the number of FTEs, and not simply the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

Because the eligibility rules are based in part on the number of FTEs, not the number of employees, businesses that use part-time help may qualify even if they employ more than 25 individuals.

New Benefits for Employers that Hire and Retain Recently Unemployed

Employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of Social Security tax on wages paid to these workers after March 18. In addition, for each qualified employee retained for at least a year whose wages did not significantly decrease in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their income tax return.

These tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives generally do not qualify.

Employers must get a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. IRS Form W-11 can be used to meet this requirement.

Work Opportunity Tax Credit Aids Employers That Hire Certain Workers

The work opportunity tax credit (WOTC) offers tax savings to businesses that hire employees belonging to various targeted groups. These groups include people ages 18 to 39 living in designated communities in 43 states and the District of Columbia, recipients of various types of public assistance, certain veterans, ex-felons and certain youth workers. The instructions for Form 8850 detail the requirements for each of these groups.

Certification by the state workforce agency is generally required. Normally, a business must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work.

An eligible employer can claim both the WOTC and the new hire retention credit for the same employee. However, an employer may not claim both the payroll tax exemption and the WOTC for the same employee. Therefore, any employer that chooses to apply the exemption to wages paid to a qualified employee may not receive the WOTC on any wages paid to that employee during the one-year period beginning on the employee’s hiring date.

COBRA Credit

Employers that provide the 65 percent COBRA premium subsidy to eligible former employees can claim credit for this subsidy on their quarterly or annual payroll tax returns. To help avoid imposing an unnecessary cash-flow burden, affected employers can reduce their payroll tax deposits by the amount of the credit. For details, see the instructions for Form 941 at IRS.gov

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[Previous Update] The IRS has announced the availability of two new tax benefits for employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act. The HIRE act is part of the jobs bill that encourages businesses to hire and help put people back to work and the new tax benefits are especially helpful to employers who are adding positions to their payrolls this year.

Payroll Tax Incentive

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. The maximum value of this incentive is $6,621, which equals to 6.2 percent of wages paid in 2010 up to the FICA wage cap of $106,800. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

This means that If you business’ hire a worker who’s unemployed, they won’t have to pay payroll taxes on that worker for the rest of the year.  Thus, businesses that move quickly to hire today will get a bigger tax credit than businesses that wait until later this year. Intuit Online Payroll Easy to Setup and Use. Try Now FREE for 30 Days, plus 2 more months at $9.99!

$1000 General Business Tax Credit

In addition, for each worker retained for at least a year (52 weeks), businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

Qualification Criteria

New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify. In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Employers 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 on their revised employment tax form for the second quarter of 2010. Revised forms, employee statement criteria, and further details on these two new tax provisions will be available during the next few weeks.  (I will publish a link to these forms when available, and encourage you to subscribe (free) via RSS or Email to get the updates)

President Obama on the Jobs Bill/HIRE Act

Here is some more information on what President Obama had to say when signing the jobs bill, which legislates the HIRE act, into law:

So here’s the good news: A consensus is forming that, partly because of the necessary – and often unpopular – measures we took over the past year, our economy is now growing again and we may soon be adding jobs instead of losing them.  The jobs bill I’m signing today is intended to help accelerate that process. I’m signing it mindful that, as I’ve said before, the solution to our economic problems will not come from government alone.  Government can’t create all the jobs we need or can it repair all the damage that’s been done by this recession.

Now, make no mistake:  While this jobs bill is absolutely necessary, it’s by no means enough.  There’s a lot more that we’re going to need to do to spur hiring in the private sector and bring about full economic recovery – from helping creditworthy small businesses to get loans that they need to expand, to offering incentives to make homes and businesses more energy efficient, to investing in infr
astructure so we can put Americans to work doing the work that America needs done.

Nevertheless, this jobs bill will make a difference in several important ways.  First, we will forgive payroll taxes for businesses that hire someone who’s been out of work at least two months. That’s a tax benefit that will apply to unemployed workers hired between last month and the end of this year.  So 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.

This tax cut will be particularly helpful to small business owners.  Many of them are on the fence right now about whether to bring in that extra worker or two, or whether they should hire anyone at all.  And this jobs bill should help make their decision that much easier.  And by the way, I’d like to note that part of what health insurance reform would do is to provide tax credits for over 4 million small businesses so they don’t have to choose between hiring workers and offering coverage.

The single mother who’s told me she’s filled out hundreds of job applications and been on dozens of interviews, but still hasn’t found a job.  The father whose son told me he started working when he was a teenager, and recently found himself out of a job for the very first time in his life.  The children who write to me – they’re worried about their moms and their dads, worried about what the future holds for their families.

That’s who I’m thinking about every morning when I enter into the Oval Office.  That’s who I’m signing this bill for.  And that’s who I’m going to continue to fight for so long as I am President of the United States.

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{ 7 comments… read them below or add one }

Left is Right May 28, 2010 at 2:12 pm

So he is going to give less than $33,000 to each of more than 1,000,000 businesses and they are supposed to hire people and give people raises.. They won’t even be able to hire one person to work for those wages by the time they have to pay all of the other expenses associated with an employee. He should tax voting and posting on the internet to raise more money so that he can give the businesses a decent amount of money so that they could hire one full time employee each. Even that still will not get the unemployment rate down to 8 percent which he said would be all the higher it would go up to if his spending plans passed.

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bruce laporte November 2, 2010 at 3:36 pm

Tax for voting? A Poll Tax is unconstitutional, and web voting encourages voter fraud. The solution is simple, lower taxes on businesses so they reinvest in their business, lower taxes on people so they spend, cut spending on basically everything but that which the constitution says they are allowed…defense.

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Working Man May 28, 2010 at 2:11 pm

Stimulus money can only go so far, for what seems to me to be obvious reasons. It’s limited. Eventually you have no one else to tax. Not to sound overly simplistic with a solution, but government needs to make damn sure this limited tax money goes towards real job creation. As we all know our congress has often used something like this to pass their pet projects for their constituency. And ,yes, I would definitely ease up on taxes on small business. I think one of the reasons jobs have gone overseas is because US income taxes are so high, that companies have to sufficiently increase pay for US workers to make it even worthwhile for the employee to do the work, if he has a choice. Think about it. The government removes incentives when taxes are too high. I’m retired early at 55 because it wasn’t worth it for me to keep working and earn so much only to surrender about 35% to Uncle Sam. It was like a tread mill. I’d consider another engineering contract, but with the current environment, no one wants a 60 year old engineer, and I’m not so sure I want to bust my arse at this point only to surrender much of it to the governement. Kind of rambled some there I guess, but maybe you got some of it.

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Kary May 28, 2010 at 2:10 pm

We were promised that the tax breaks to companies that outsource jobs would be taken away. We haven’t seen that. This is not protectionism. No company should get tax breaks while outsourcing. Demand truly fair trade agreements. The USA will not recover without jobs unless we want to become a third world country like Mexico with only the rich and the poor and no middle class. Email your congressman and ask them to pass the bill to kill outsourcing tax breaks.

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Bill Gaskin May 24, 2010 at 12:34 pm

Very well written and informative, maybe this federal tax relieve will put more people to work. I just hope that this economy gets better soon because it seems that 4 out every 6 people that I know are still unemployed.

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Ab Kr March 23, 2010 at 6:37 am

>Great writing. I think you have a deep knowledge of economics. I enjoyed learning it.

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Andy March 20, 2010 at 11:39 pm

>Just to clarify, based on ADP site info:

The 6.2% Employer Social Security Tax exemption applies to 2010 wages paid after March 18 and before January 1, 2011, to individuals hired after February 3, 2010, who were previously unemployed for at least 60 days and who do not exceed the $106,800 Social Security wage base.

* Employers can save the 6.2% Employer Social Security Tax, whether they hire a $40,000 worker, or a $90,000 worker. Employers, including nonprofit organizations, and colleges and universities, would not have to wait until 2011 to benefit from this tax relief because savings would accrue with each payroll processed.

* The legislation also encourages businesses to hire workers earlier in the year because the tax benefit will be greater. For example, a $60,000 worker hired on April 1 saves an employer about $2,800 in taxes. Delaying the hiring until June 1 would reduce savings to about $2,200.

* This exemption has no cap or limit as to the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying worker, whether they hire one worker or hundreds of new workers.

Tax Credit

Employers will receive an income tax credit, which is either $1,000 for each qualifying worker hired after February 3, 2010, and employed for at least 52 consecutive weeks, or 6.2% of wages paid to the qualifying worker over the 52-week period, whichever is less. Wages during the last 26 weeks must be at least 80 percent of wages paid for the first 26 weeks.

* Any new hire must certify "by signed affidavit," under penalties of perjury, that he/she has "not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment."

* Neither the 6.2% Employer Social Security Tax exemption nor the retention tax credit is permitted if a person is hired to replace another employee "unless such other employee is separated from employment voluntarily or for cause."

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