President Obama Signed Into Law the HIRE Act

On Thursday, March 18th 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law (Pub. Law 111-147). According to President Obama this bill will spur job creation and expedite our economy’s recovery. 

This act will provide an employer with Social Security tax exemption (tax holiday) as well as income tax credits. Below are details on both: (This exemption only applies to Social Security, not Medicare).

The Social Security tax holiday -

As an employer, you are familiar with matching an employee’s Social Security tax which is 6.2% of their taxable wages up to $106, 800 for 2010. Effective March 19^th, an employer can be exempt from the employer share of Social Security taxes that are paid to a “qualified individual”.  This will account for wages paid on or after March 19^th.  These wages could have been earned on a prior date; they just need to be paid after the date of the enactment of this Act. Your exemption could be as great as $6,621.60 ($106,800 * 6.2%) per employee.

Income Tax Credit –

You can earn an additional income tax credit on your business return.  The credit is the lesser of $1,000 or 6.2% of the wages paid during the year.  To qualify for this income tax credit, the following criteria must be met:

1. The employer has employed this qualified individual for at least 1 year (52 consecutive weeks).

2. The employee receives wages during the second 26 weeks of this period that are at least 80% of the wages they received during the first 26 weeks of the period.

3. The employer can not be a Household employer.

What is a “qualified individual”?

* Someone who is not hired to replace another employee.  However it is okay if the prior employee left voluntarily or was terminated for cause.

* One who begins employment after February 3, 2010 and before January 1, 2011.

* An employee who signs an affidavit to certify that he or she has not been employed for more than 40 hours during the 60 day period ending on the day the individual begins work for the company.  The IRS is creating a form that can be used as an affidavit.  In the interim, you will need to create your own form.

*  An employee who is not related to the employer or to anyone owning 50% or more stock in the company.

*  An employee who’s wages are not being used towards a “Work Opportunity Tax Credit”.  An employer can only use one of these credits.

Special Rule for 2010 1st quarter deposit and filings: The act states that employer’s must not stop depositing the employer’s share of Social Security for the first quarter, but rather make a payment against the employer share of Social Security tax that will be due for the second quarter of 2010.  This would include payments from March 19^th (day after act was signed into law) and March 31^st.  During the first quarter, the employer must deposit the full employer share for wages paid and report it on the first quarter 941. The employer will be able to treat the qualified tax deduction from the first quarter as a payment in the second quarter.  The IRS is currently developing a revised 941 to accommodate this process.

NOTE: Per the IRS, this Social Security exemption will “have no effect on the employee’s future Social Security benefits”.

This should temporarily reduce the cost of labor as well as help unemployed individuals obtain employment.  However, this is going to cause companies to make either manual or automated changes to their payroll process and 941 filings.  So that you are not scrambling at the last minute when completing the new IRS 941 for the 2^nd quarter, I would advise that you start tracking your potential exemption and credit now.

We anticipate the IRS to release more guidance on the depositing and tax reporting issues.  Please stay tuned to our blog for further updates.