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New Tax Incentives for Hiring Unemployed Workers

TaxAlerts Tax Article

April 2010 | Written by: Karen Reed, EA

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The Hiring Incentives to Restore Employment (HIRE) Act was signed into law by President Obama on March 17th, 2010. The act includes the “Hire Now Tax Cut,” which combines payroll tax forgiveness with a tax credit for retaining employees in a two–pronged approach to boosting U.S. payrolls.

Businesses that hire previously unemployed individuals will enjoy relief from paying the 6.2 percent Social Security tax on wages paid to those employees during any period starting after February 3rd, 2010, and before January 1st, 2011. This could translate into tax savings of up to $6,621 per new hire, depending on the salary of the individual. Employers that keep these newly hired workers on the payroll for at least 52 consecutive weeks will become eligible for an additional tax credit equal to the lesser of $1,000 or 6.2 percent of the employee’s wages for the fifty–two week period.

To qualify an employer for the tax breaks, the new employee must not have been employed for more than forty hours during the sixty–day period ending on the start date of the new job. The individual must not replace a current employee unless that employee voluntarily leaves the position or is let go for cause. The new hire cannot be related to the employer or own more than fifty percent of the business. There is no minimum or maximum number of hours the employee must work.

To be eligible for the credit, the employer must pay the retained worker an amount equal to at least eighty percent of his or her first twenty–six weeks of wages during the last twenty–six weeks of the fifty–two consecutive week qualifying period. Domestic workers and individuals who are eligible for the foreign earned income exclusion do not qualify an employer for the credit. An employee who had previously been laid off is considered a qualified individual for the purposes of the credit.

An employer may elect to opt out of the payroll tax forgiveness provision. A business that claims the Work Opportunity Tax Credit (WOTC) is not allowed to include in the WOTC calculation wages paid to individuals for whom it does not pay the 6.2 percent OASDI tax.