Adding Employees to Payroll Offers Tax Benefits for Small Businesses

Adding Employees To Payroll Offers Tax Benefits For Businesses

hire actWhen you figure your 2010 business taxes, don’t forget about the Hiring Incentives to Restore Employment (HIRE) Act, signed into law March 18, 2010. The HIRE Act created two new tax benefits for qualified employers who hire certain qualified employees. If you have added employees to your payroll in the last year, it’s worth your while to explore whether your business can qualify.The Payroll Tax Exemption
Qualified employers may receive an exemption on their 6.2% share of Social Security payroll tax for wages paid to qualified employees between March 19 – Dec. 31, 2010. While the payroll tax exemption is not available to employers in 2011, if you missed out, you can still get the exemption retroactively (for up to three years.) File an amended 941-X and complete the W-11 affidavit explained below.

[RELATED ARTICLE: Use Form 941-X to Correct Payroll Tax Errors]

The HIRE Retention Credit
If you added a new employee to your payroll between Feb. 3 – Dec. 31, 2010, you may qualify for the HIRE Retention Credit on your business income tax return.

Qualified employers can take this General Business Credit of $1,000 for each qualified employee retained for at least 52 consecutive weeks, whose wages do not significantly decrease during the last 26 weeks. The credit is the lesser of $1,000 or 6.2% of wages paid to the employee during the 52-week period. The employee’s wages in the last 26 weeks must equal at least 80% of wages for the first 26 weeks. This credit can’t be carried back to years before March 18, 2010, but can be carried forward.
Definitions
Qualified employees:

  1. Began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011;
  2. Are not family members of or related in certain other ways to the employer;
  3. Are not replacing another employee of the qualified employer, unless the other employee terminated employment voluntarily or was terminated for cause; and
  4. Certify by signed affidavit, under penalties of perjury, that they have not been employed for more than 40 hours during the 60 days ending the date they started employment.

You can use Form W-11, The (HIRE) Act Employee Affidavit, to meet the employee affidavit requirement. Although you need this certification to claim both tax benefits, you won’t file these statements with the IRS. Retain the documents with your payroll and income tax records.

Qualified Employers:

  1. Taxable businesses and tax-exempt organizations in the U.S. or in any U.S. territories subject to Social Security tax.
  2. Federal, state, and local government employers generally do not qualify. However, public colleges and universities can qualify, as well as Indian tribal governments.
  3. Household employers do not qualify.

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