Federal HIRE Act Provides New Tax Benefits for Hiring Unemployed Workers

Somewhat lost in the excitement of pending healthcare legislation, on March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act.  The HIRE Act features two new tax benefits designed to incentivize employers to hire and retain workers who were previously unemployed or working part time.

Under the HIRE Act, the employer’s share of the social security tax (6.2%) will not apply to wages paid by private sector employers and public institutions of higher learning to qualified workers with respect to employment between March 19, 2010 and December 31, 2010.  To qualify for this tax benefit, the new part-time or full-time worker must be hired by the employer after February 3, 2010 and before January 1, 2011, and the worker must not have been employed for more than 40 hours during the 60 day period prior to the date of hire.  The hired worker cannot be related to the employer and cannot replace another employee of the employer unless the former employee separated from employment voluntarily or was terminated for cause.  Based on the social security tax wage cap of $106,800, the maximum value of this incentive is $6,621 for any qualified employee.  The employer will still be required to withhold the employee's 6.2% share of social security taxes, and both the employer and employee shares of the Medicare tax (1.45% each) will continue to apply to the wages paid to these qualified workers.

In addition to the exclusion from social security tax, the employer may also be entitled to an income tax credit with respect to these hired workers.  To qualify for the credit, the hired worker must be retained as an employee for not less than 52 consecutive weeks and must receive wages for the last 26 weeks that are at least 80% of wages for the first 26 weeks.  The amount of the credit is the lesser of $1,000 or 6.2% of the wages paid during the 52 week period to the retained worker.  Therefore, if the wages paid to the worker exceed $16,129, the employer will be entitled to the full $1,000 credit.  The credit will be taken by the employer in 2011, and it cannot be carried back to 2010 under the normal general business credit rules.  The credit will pass through to the owners of pass through entities such as S corporations and limited liability companies that meet the requirements for this income tax credit.

Businesses that are planning to increase their workforce may want to consider hiring unemployed workers as early in 2010 as possible to maximize the social security tax savings and to ensure their eligibility for the income tax credit in 2011.

  • Mark E. Sims
    Partner

    Mark Sims practices in the Business Representation & Transactions Group and works primarily in the federal income tax, business planning and healthcare areas. Mark's federal tax practice involves individual, corporate, S ...

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