The most recent statistics show that the federal unemployment rate is at 10.2%, the highest in more than 20 years. Despite indications that the nation’s economy might otherwise be improving, most Americans agree that unless folks can find jobs, a complete recovery is not likely.
With pressure from constituents to try to turn things around, Washington made a few attempts to kick start hiring. Initially, President Obama proposed a tax credit of $5,000 for small businesses who committed to hiring new employees. The credit met with resistance on two key points, cost and potential for fraud, and was eventually tossed.
Congress continued to push alternative solutions for the unemployment dilemma, eventually settling on H.R. 2847. The bill, sponsored by Rep. Alan Mollohan (D-WV), was originally introduced in June of 2009 and was immediately passed in the House. However, the bill spent nearly five months in the Senate before it was finally approved and sent to the White House. The final law, referred to as the Hiring Incentives to Restore Employment (HIRE) Act, was signed into law by President Obama last month.
Under the terms of the new law, employers who hire previously unemployed workers after February 3, 2010, but before January 1, 2011, may qualify for a 6.2% payroll tax break. The tax break has the effect of exempting employers from their share of Social Security taxes on wages paid to qualified new hires. The benefit applies to businesses, agricultural employers, tax-exempt organizations, and public colleges and universities who hire eligible employees.
To claim the credit, employers must have all eligible new hires complete a form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit (downloads as a pdf), which must be signed under penalties of perjury. The statement requires new hires to verify that they have “been unemployed or have not worked for anyone for more than 40 hours during the 60-day period ending on the date I began employment with this employer.” It’s not necessary to forward the form along to the IRS but employers need to keep a signed form W-11 on file for each new employee to claim the credit.
For purposes of the credit, a new employee cannot be hired to replace another employee unless the other employee left voluntarily or was downsized. In other words, firing an employee in order to hire another employee to gain a tax credit isn’t allowed. However, if an employer lays an employee off because there was no work at the company for a period of time and then later hires a new employee because work at the company is increasing, the tax credit is allowed.
Household employers cannot claim this new tax benefit for household employees such as nannies and maids. Additionally, employers may not claim the tax break for hiring relatives even if they otherwise meet the criteria. Relatives include the obvious (kids and grandkids) and extend to nieces and nephews; parents; aunts and uncles and in-laws. For purposes of the tax break, an employee is also considered related if he or she is related to anyone who owns more than 50% of the outstanding stock or capital and profits interest in the company or is a dependent of anyone who owns more than 50% of the outstanding stock or capital and profits interest in the company.
If an employer keeps these new employees on their payrolls for a year, the employer may claim an additional tax credit of up to $1,000 per worker when they file their 2011 income tax returns. The amount of the credit is the lesser of $1,000 or 6.2% of wages paid by the employer to the employee during a 52 consecutive week period. The credit cannot be carried back but may be carried forward.
It’s important to note that the payroll tax credit is on the employer side. Employees are still subject to Social Security withholding from their wages and the reduced payroll tax on the employer’s side will not have any effect on the employee’s future Social Security benefits. Medicare taxes would also still apply for wages on the employer and employee side.
If the employee also qualifies under the Work Opportunity Tax Credit (WOTC), the employer may not claim both. If an employer chooses to count wages paid to the employee for purposes of the payroll tax credit, those wages cannot be taken into account for purposes of WOTC: it’s one or the other. To qualify for the WOTC for a particular employee instead of the payroll tax exemption, an employer has to opt out of the payroll tax credit.
The IRS believes these incentives will help boost the economy. IRS Commissioner Doug Shulman said, about the Act, “These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead.”
While any improvements in the job market are considered a good thing, some observers claim that the tax break won’t do enough to spur the market quickly. Estimates indicate that the tax break will boost employment rosters by roughly additional 250,000 jobs by the end of the year – which is good, right? However, with more than 15 million Americans out of work (an increase of 8.4 million since the recession began), many wonder when (and if) Congress is planning to do more.