Article
Navigating the new hiring incentives
The recently enacted HIRE Act offers QSR operators and other employers $13 billion in tax breaks to incentivize new hires. Here's a breakdown.
April 13, 2010
The 2010 Hiring Incentives to Restore Employment (HIRE) Act received plenty of media attention when it was recently signed into law. For quick-service restaurants and other businesses, the new law translates into a whopping $17.6 billion in tax breaks while pumping $20 billion into highway and transit programs. Two of the new law's provisions will be especially helpful to employers who are adding positions to the payrolls.
In addition to the hiring tax incentives, the new law extends a tax break for small businesses buying new equipment, while another section of the bill expands an initiative that helps state and local governments finance infrastructure programs just in time for the spring construction season.
Here's a breakdown of the hiring incentives:
Job creation incentives
At the heart of the HIRE Act are $13 billion in tax breaks for QSR operators to boost hiring of unemployed workers in 2010. The "Hire Now Tax Cut" combines payroll forgiveness for Social Security taxes paid on qualified new hires, along with a tax credit for then keeping the new hire on the payroll for at least 52 consecutive weeks.
In essence, the HIRE Act payroll forgiveness component consists of the following:
- An exemption from Social Security payroll taxes for every worker hired after February 3, 2010, and before January 1, 2011, who has been unemployed for at least 60 days.
- Only wages paid after the law's March 19 enactment date qualify for the payroll tax exemption.
- A qualified individual may be hired for any number of hours since the benefits to the employer are tied only to 6.2 percent of any salary paid.
- The maximum value of the credit would be equal to 6.2 percent of wages up to $106,800, which is the Federal Insurance Contributions Act (FICA) wage cap, generating a maximum value of the incentive of $6,621 for any "qualified employee."
- No minimum or maximum number of hours is required, but some coordination with employees who have or have had more than one job may be required. Employers may be held liable for employee misinformation.
- Be aware the payroll tax holiday applies only to the 6.2 percent Social Security portion of the employer's tax, not to the 1.45 percent Medicare portion of the employer's tax or to any part of the employee's tax. Furthermore, it does not affect the self-employment tax paid by self-employed QSR owners, operators or franchisees.
- To claim their exemption, operators will use the revised Form 941, Employer's Quarterly Federal Tax Return, for the second quarter return due on Aug. 2, 2010, even for exemptions earned for the period from March 19, 2010, to March 31, 2010.
Tax bill reducing credits
Additional employer benefits include the $1,000 income tax credit for every new employee retained for 52 weeks, to be taken on the employer's 2011 income tax return. The new retention incentive is provided via an increased business tax credit for each qualified worker, by the lesser of:
- $1,000 or
- 6.2 percent of wages paid by the taxpayer to the qualified retained worker during a 52-consecutive-week period
The "6.2 percent of wages paid by the taxpayer" language was added to the HIRE Act to prevent qualification for the full $1,000 credit for only minimal part-time work. Based upon the 6.2 percent cap, any newly hired employee who earns more than $16,129 during the 52 consecutive-week period would qualify his or her employer for the full $1,000 retained worker credit.
The retained worker credit will generally be taken on the employer's 2011 income tax return because of the 52 consecutive-week prerequisite. To prevent any retroactive benefit, the HIRE Act disallows carrying back any portion of the unused business tax credit attributable to the provisions for retained workers.
According to the Internal Revenue Service, the payroll tax holiday and up-to-$1,000 credit will be 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 do not, of course, qualify.
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With these benefits to employers, the IRS will be on the look out for two potential trouble-spots for abuse. First, only payments to employees qualify. Thus, wrongly qualifying workers as independent contractors, as well as "converting" independent contractors into "new employees," are issues the IRS will be looking out for. Second, as mentioned, a qualifying new employee may only replace an existing employee who voluntarily ends employment or is fired for cause. Employment law issues are certain to arise over this requirement.
Employers will have to 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 40 hours for someone else during the 60-day period.
The recently issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is available for employees to make the required statement. The IRS is expected to issue soon the revised employment tax forms for the second quarter of 2010 as well as more detailed guidance on the new provisions. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is for wages paid by employers who hire individuals from certain targeted groups of hard-to-employ individuals. Provisions include:
- Employers who hire people before September 2011 who have been certified by an agency as belonging to a targeted group may claim a WOTC equal to a percentage of up to $6,000 of first-year wages per employee, $12,000 for qualified veterans, and $3,000 for qualified summer youth employees.
- If the employee is a long-term family assistance recipient, the tax credit is a percentage of first- and second-year wages, up to $10,000 per employee.
- For new hires eligible under the HIRE Act as well as for the WOTC, the QSR or business must select one benefit or the other for 2010. For those hiring low-wage employees, the WOTC may be more beneficial because it allows 40 percent (generally) of "qualified first-year wages" of up to $6,000, and a maximum credit of $2,400 per worker. But the WOTC is more difficult to apply for, however.
Extension of first-year write-offs
The newly-passed HIRE Act extends the 2008 and 2009 expensing thresholds so that QSRs and businesses can write-off up to $250,000 of certain capital expenditures — subject to a phase-out once expenditures exceed $800,000 — in 2010 in lieu of depreciating those costs over time.
An improved cash flow
The tax benefits from the new incentives are immediate. It puts money into a QSR's cash flow immediately, since the tax is simply not collected in the first place. On the downside, someone will have to eventually reimburse Social Security for the lost revenue. There also is the prediction the tax breaks may generate only 250,000 jobs in 2010 — just a small fraction of the 8.4 million jobs lost since the recession began. Will you and your QSR or business be among those who reap the savings under the HIRE Act?
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