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March 31, 2010

Federal HIRE Act Provides Incentives For Employers To Hire New Employees

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment Act (the “HIRE Act”), which is intended to accelerate the hiring of unemployed workers.  Specifically, the HIRE Act includes a payroll tax exemption and increased tax credits for all employers, except certain governmental employers.  Non-profit organizations as well as state colleges and universities are also eligible for the benefits.

Qualified Employees

In order to qualify for the tax benefits under the HIRE Act, an employer must hire a new “qualified employee” who (1) begins employment after February 3, 2010 and before January 1, 2011; (2) certifies, by a signed affidavit, that he or she has not been employed for more than 40 hours during the sixty-day period immediately preceding the beginning of employment; (3) is not hired to replace another employee, unless that former employee voluntarily resigned or was terminated for cause; and (4) is not related to the employer in one of the following ways: son, daughter, or descendant of either; stepson or stepdaughter; brother, sister, stepbrother, stepsister; father, mother, or ancestor of either; stepfather or stepmother; niece or nephew; aunt or uncle; or the following in-laws: son, daughter, father, mother, brother, or sister.  A sample affidavit form is attached.

The Social Security Tax Exemption

Under the HIRE Act, an employer that hires a qualified employee who commences employment on or after February 4, 2010 and not later than December 31, 2010 need not pay the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) portion of its Federal Insurance Contributions Act (FICA) tax obligation – or 6.2% of the first $106,800 earned in 2010 – during the employment period from April 1, 2010 to January 1, 2011.  While an employer must continue to pay its portion of the FICA tax on wages paid to a qualified employee from the period February 4, 1010 through March 31, 2010, these payments will be credited against the employer’s portion of the FICA tax due in the second quarter relating to all of its employees.

The FICA tax exemption does not apply to the employer’s obligation to pay the Medicare Hospital Insurance portion of FICA taxes on all wages paid to qualified employees.  In addition, the employer must still withhold the employee’s portion of the FICA tax, as the exemption does not apply to the employee’s obligation to pay FICA taxes.   

There is no cap or limit as to the total amount of tax benefits that can be claimed by an employer under the Social Security Tax Exemption.  Thus, an employer may save up to $6,622 per qualified employee, whether it hires one qualified employee or many. 

An employer who takes advantage of the tax exemption is not eligible to claim any available Work Opportunity Tax Credit (WOTC) for that employee, such as for veterans, ex-felons, and summer youth employees.  The WOTC may be more valuable for employers who employ low-wage employees or employees hired later in 2010.  However, the WOTC may be harder to qualify for because it is available for only certain groups of employees and a state agency must certify that the employee is part of one of the specified groups.

The Retained Worker Tax Credit

An employer who retains a qualified employee in employment for 52 consecutive weeks may claim the Retained Worker Tax Credit (RWTC), which is equal to the lesser or $1,000 or 6.2% of the qualified employee’s wages for the 52-week period.  Thus, for any qualified employee whose wages for such period total at least $16,130, the $1,000 tax credit will apply.

In order to be eligible for the tax credit, the wages paid to the qualified employee during the last 26 weeks of the 52-week employment period must equal at least 80% of wages paid for the first 26 weeks of the period.  The tax credit will be taken on the employer’s 2011 tax return.  In addition, if the qualified employee remains steadily employed with the employer after April 1, 2011, the employer will be entitled to an additional $1,000 credit against payroll taxes.

Employer Actions

Employers should identify all current employees who may meet the requirements of a qualified employee and ask each such employee to sign an affidavit to that effect.  Additionally, employers should ask each newly hired employee through the end of the year to sign an affidavit as well.  Employers should also coordinate with their payroll department or payroll service to adjust payroll systems to reflect the Social Security Tax Exemption.

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If you should have any questions regarding the HIRE Act subsidy or the necessary steps to take advantage of the tax benefits, please contact us.

Putney, Twombly, Hall & Hirson LLP