Enjoy A Payroll Tax Holiday

Anne E. Zerbe, Andrew M. Paxton

With more than 14.9 million unemployed workers, on March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act of 2010, to encourage businesses to hire and help put unemployed Americans back to work. 

Your business may be eligible for a payroll tax holiday and up to a $1,000 tax credit for hiring an unemployed worker.  If your business is a qualified employer - private-sector employer, non-profit organization or public higher (post-secondary) educational institution - that hires a qualifying employee, your business will be  exempt from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010.

A qualifying employee is a worker who has not been employed for more than 40 hours during the 60-day period ending on the date employment begins and must sign an affidavit, under penalties of perjury to certify.  The date of hire must be after February 3, 2010 and before January 1, 2011.  A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.  In addition, a qualifying employer cannot claim the new tax breaks for hiring family members.

With this new law, there is no minimum wage requirement or weekly number of hours that the new employee must work; therefore, it includes part-time employees.

Tax Benefits

The tax benefit of the new incentive is immediate.  It puts money into your business’ cash flow immediately, since the tax is simply not collected in the first place.  A company could save a maximum of $6,621 if it hires a qualified employee and pays that worker at least $106,800 – the maximum amount of wages subject to Social Security taxes – by the end of the year.

The incentive isn't biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.  Employers must continue to pay their 1.45% HI (Medicare Hospital Insurance) tax and withhold the employee’s entire share of social security taxes. 

The payroll tax holiday doesn't apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.

As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee's pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker's wages during the 52-consecutive-week period exceed $16,129.03. However, the credit isn't available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

Employers may not also claim a Work Opportunity Tax Credit (WOTC) for any employee for whom the employer is eligible to claim a HIRE Act business tax credit.  The employer must select one benefit or the other for 2010.  There is no double dipping.  

For more information on the HIRE Act, please contact CGA’s Labor and Employment Law Group and Tax Law Group.