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Federal HIRE Act Extends Tax Benefits To Employers

April 2, 2010

On March 18, 2010, President Obama signed into law H.R. 2847, the Hiring Incentives to Restore Employment (HIRE) Act. Under the HIRE Act, all employers, except certain governmental employers, are eligible for two new tax benefits – a FICA payroll tax exemption and a separate "retained worker" tax credit – designed to stimulate hiring.

The purpose of the Act is to encourage employers to hire unemployed workers. Therefore, the Act's employment tax benefits are limited to "qualified" employees; specifically, those who:

  • Begin employment after February 3, 2010 and before January 1, 2011.
  • Certify by signed affidavit (under penalty of perjury) that they were not employed for more than 40 hours total during the 60-day period ending on the date they started working for the qualified employer. (Note: the IRS is currently developing a form affidavit for employers to use.)
  • Are not hired to replace another employee unless that other employee "separated from employment voluntarily or for cause."
  • Are not related to the employer under rules in the Internal Revenue Code.

The Act's payroll tax exemption allows eligible employers to forgo paying the Old-Age, Survivors, and Disability Insurance ("OASDI") portion of their FICA tax obligation (i.e., 6.2 percent of wages up to $106,800 for 2010) on wages paid to qualified employees from March 19, 2010 through December 31, 2010. The exemption does not apply to the Medicare hospital ("HI") portion (for 2010, an additional 1.45 percent of wages without cap) or to the employee's portion of the FICA tax. Thus, employers must continue to pay their HI portion and continue to withhold the total employee portion of the FICA tax.

The payroll tax exemption must be claimed on the federal employment tax return that is filed, usually quarterly, with the IRS. The exemption is phased in over the first and second quarters of 2010. Employers are required to continue paying their regular FICA tax obligation for the first quarter of 2010. Exempt amounts paid for the first quarter will be treated as an advance payment of taxes owed for the second quarter. By the second quarter, the IRS expects to have a revised employment tax form to claim the exemption.

The Act's separate tax credit gives employers an additional general business tax credit for every qualified employee the employer retains for 52 consecutive weeks. The available credit is equal to the lesser of $1,000 or 6.2% of the retained employee's wages for the 52-week period. The credit will first be available for the 2011 tax year (for calendar year taxpayers) given the 52-week employment requirement. In order to claim the credit, the wages paid to the qualified employee during the last 26 weeks of the 52-week period must equal at least 80% of such wages for the first 26 weeks of the period.

If you have any questions about the HIRE Act please contact Stephanie Setterington, Jeff Gray or any other member of Varnum's Labor and Employment Practice Team.

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