Employment Law Blog

News, trends and analysis in employment law and HR

Mar 22, 2010

HIRE Act gives tax breaks for hiring unemployed workers


President Obama has signed the Hiring Incentives to Restore Employment (HIRE) Act, which provides immediate payroll tax relief for employers who hire certain unemployed workers, and rewards employers with a tax credit after the workers have been on the job for a year. Unfortunately, the new law contains a major exclusion. It doesn’t apply to workers who are hired to replace another employee, unless the previous worker quit or was fired for cause. So, for employers who previously downsized and are now beginning to hire people back into the jobs that were eliminated, these tax incentives can’t be used for those new hires (HR 2847).

Relief from payroll taxes:
To qualify:
• The worker must begin employment after February 3, 2010 and before January 1, 2011.
• You must have the worker sign an affidavit, under penalty of perjury, that he or she has not been employed for more than 40 hours during the 60-day period before becoming employed with you.
• The worker isn’t replacing another employee, unless the prior employee quit or was fired for cause.
• The worker isn’t a relative of the owner.

Other things to know:
• If a worker qualifies, then you are exempt from paying the usual 6.2 percent Social Security (FICA) tax for that worker during 2010.
• The exemption applies to wages paid on or after March 19, 2010, but don’t make any changes to your payroll withholding until April 1, 2010. Any of the Social Security taxes that you paid on behalf of a qualified worker during the first calendar quarter are treated as an advance payment on taxes owed during the second calendar quarter of 2010.
• The exemption stops once the worker receives wages over the Social Security cap ($106,800). 
• There is no cap on the total amount of tax benefits that you can claim.

Tax credit for retaining newly hired workers
To qualify:
• The worker must meet the qualification tests described above (i.e., you were relieved from paying Social Security taxes for the worker under the HIRE Act).
• You must employ the worker for at least 52 consecutive weeks.
• The worker’s wages during the last 26 weeks of that period of employment must be at least 80 percent of his or her wages for the first 26 weeks.

Other things to know:
• The amount of the credit is $1000, or 6.2 percent of the wages that you paid during the 52 consecutive weeks, whichever is less. 

Tips: The new law gives no guidance on what it means to “replace” an employee. If you downsized three months ago and are now bringing people back into the downsized jobs, it seems clear that those new hires wouldn’t qualify for tax relief under the HIRE Act. But what if you downsized two years ago and are now hiring again? Unless the IRS provides guidance that says otherwise, employers who fail to pay Social Security taxes on those workers may risk fines in the event of an IRS audit. Discuss your options with your tax adviser. Vigilant will keep members informed of any further developments.