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Annette Nellen
Employers — Please Stimulate the Economy!

Yet one more measure — the Hiring Incentives to Restore Employment Act, aims to stimulate the economy. What does it offer employers?

April 15, 2010
by Annette Nellen, CPA, Esq.

On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147 (PDF)). The key pieces of this stimulus legislation are two tax incentives for hiring workers. HIRE also includes a few other incentives as well as significant "offsets" such as new reporting rules for certain foreign accounts.

With two highly publicized healthcare reform bills also signed into law in March, HIRE seems to be overshadowed. However, employers and their tax advisers will want to take a close look at HIRE and act now to maximize the available tax breaks and become familiar with the new foreign account reporting requirements. This article lists the provisions of HIRE and explains the two hiring incentives. In addition, compliance considerations of the hiring incentives are covered, as well as policy aspects of these provisions. 

HIRE Basics

Upon signing the bill (H.R. 2847) President Obama stated that the new law will "encourage businesses to hire and help put Americans back to work” (White House press release, March 18, 2010). He noted that while the economy was once again growing, HIRE would "help accelerate" the process of adding jobs.

HIRE includes the following provisions; the estimated revenue effect over ten years (2010 to 2020) is shown in brackets (in millions of dollars). The revenue estimates are from the Joint Committee on Taxation (JCX-6-10; March 4, 2010). HIRE is estimated to generate almost $1 billion over 10 years.

  • Employer payroll tax forgiveness for new workers. [-$7,616]
  • Income tax credit for retaining new workers. [-$5,422]
  • Temporary restoration of the higher Section 179 expensing limits that expired at the end of 2009. Thus, up to $250,000 of eligible property placed in service in 2010 can be expensed (rather than $125,000). This figure is reduced by the amount of qualifying property placed in service in 2010 that exceeds $800,000 (rather than $500,000). [-$35]
  • Modification to Build America Bond provisions to further encourage employment. [-$4,561]
  • Transfers to the Highway Trust Fund and extension of expenditure authority to enable construction jobs. [$0]
  • Foreign account tax compliance provisions at new IRC Sections 1471 to 1475, 6038D and 6111(e)(4) and modification to various IRC provisions including ones on penalties and the statute of limitations. [$8,714]
  • Further delay in the effective date of the worldwide interest allocation rules of IRC Section 864(f). [$9,911]
  • Changes to estimated tax payments for large corporations (§6655). [$0]

For information on all HIRE provisions:

  • Text of P.L. 111-147 (PDF).
  • Joint Committee on Taxation (JCT), Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the “Hiring Incentives to Restore Employment Act” (JCX-4-10), February 23, 2010.
  • Senate Finance Committee summary (March 17, 2010).

Hiring Incentives

HIRE provides employers with two tax incentives for hiring workers.
OASDI tax exemption: New IRC §3111(d) provides that a "qualified employer" is exempt from the old age, survivors, and disability insurance (“OASDI”) tax for wages paid to a "qualified individual" after March 18, 2010 and before January 1, 2011. OASDI is the 6.2 percent tax for Social Security. Employees must still pay their share of this tax and both employer and employee must continue to pay the 1.45 percent Medicare hospital insurance (“HI”) tax. There is no Self-Employment Contributions Act ("SECA") tax exemption for a self-employed person.

The wages must be paid for services performed in the qualified employer's trade or business. Thus, the exemption does not apply to household employers (IRS, FAQs About the Payroll Tax Exemption and Qualified Employers). For employers exempt from income taxes (under IRC §501(a)), the wages must be paid for services performed "in furtherance of the activities related to the purpose or function constituting the basis of the employer's [§501] exemption" (§3111(d)(1)(B)).

A "qualified employer" is any for profit or nonprofit entity. Government agencies are not entitled to the exemption except for public universities and colleges (per §101(b) of the Higher Education Act of 1965).

A "qualified employee" must satisfy the following four requirements:

  1. Begin employment after February 3, 2010 and before January 1, 2011.
  2. Certify that he has been employed 40 hours or less during the 60-day period that ends when the employment with the "qualified employer" begins. The certification must be an affidavit signed under penalties of perjury. New Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, can be used.  A "qualified employee" need not be someone collecting unemployment compensation or who has lost a job. It could, for example, be a student hired upon graduation provided they have not worked more than 40 hours in the 60 days prior to the start of employment. (See IRS, FAQs About Qualified Employees.)
  3. Cannot be replacing another employee of the "qualified employer" unless that employee left voluntarily or for cause. Thus, if an employee is laid off, another employee hired to take his place is not a "qualified employee." If the worker is rehired after 60 days, such as because the employer's business picked up, the exemption should apply (if all other requirements are satisfied). (See IRS, FAQs About Qualified Employees and JCT, JCX-4-10, page 3.)
  4. Cannot be related to the "qualified employer" as defined in §51(i)(1). Thus, most relatives of a self-employed person cannot be a "qualified employee." Also, employees related to an individual who owns over 50 percent of the value of the stock, directly or indirectly, of a corporate employer (or over 50% of the capital and profits interest in a non-corporate entity) won't generate a payroll tax exemption. A dependent per §152(d)(2)(H) with the same principal abode and who is a member of the qualified employer's household also does not qualify. See §3111(d)(3)(D) and §51(i)(1) for the details as well as special rules where the qualified employer is an estate, trust or fiduciary.

Additional observations:

  • The maximum exemption is $6,621.60 per qualified employee. This limit would only be reached if the qualified employee is paid at least the 2010 OASDI wage limit of  $106,800 during the applicable pay period.
  • The exemption applies to both full-time and part-time employees.
  • Claiming the OASDI tax exemption causes the wages paid to the worker during his first year to not be usable in computing the Work Opportunity Tax Credit (§51(c)(5)). If the employer prefers to claim the WOTC, it should elect not to claim the OASDI tax exemption (§3111(d)(4)). The JCT explanation of HIRE implies that the election can be made per qualified employee. IRC §3111(d)(4) states that the IRS will provide guidance on how to make the election. (See IRS, FAQs About Claiming the Payroll Exemption, and JCT, JCX-4-10, pages 3 – 4.) Thus, employers who hire workers eligible for both the WOTC and the OASDI tax exemption, must determine which provision is more beneficial.
  • A similar exemption applies for workers subject to Railroad Retirement Taxes (see §3221(c)).
  • The exemption does not harm Social Security funds because the payroll taxes not collected due to the exemption will be replaced using the General Fund.

Income tax credit for retention of certain employees: IRC §38(b) is amended to provide an income tax credit equal to the lesser of (1) $1,000 or (2) 6.2 percent of wages paid during the applicable 52-week period. The credit is available to employers who retain a "qualified individual" for at least 52 consecutive weeks. In addition, the worker must be employed on any date during the tax year and wages for the last 26 weeks of the period must equal at least 80 percent of wages paid for the first 26 weeks. The credit is claimed on the employer's 2011 income tax return (IRS, Business Credit for Retention of Certain Newly Hired Individuals in 2010). Special rules exist for carryovers and U.S. possessions.

Compliance Considerations

With the OASDI tax exemption enacted so close to the end of the first quarter, Congress provided that it is first claimed on second quarter payroll tax returns (Form 941, Employer's Quarterly Federal Tax Return). The exemption that pertains to wages paid in the first quarter is claimed in the second quarter (§3111(d)(5)).

While the verification that a new worker is a "qualified individual" falls upon the worker, employers would be wise to ask basic questions to be sure an eager employee is not improperly providing an affidavit. HIRE provides no penalty for individuals who provide a false affidavit yet it appears that the employer would lose the exemption if the worker is not qualified.

Employers should also consider maintaining records to show that new or rehired workers are not improperly replacing a former employee 
(§3111(d)(3)(C)).

State incentives: Employers should also determine if the state offers any employment or training credit or grant. For example, California provides an income tax credit of up to $3,000 per full-time worker hired by a small business (Franchise Tax Board, Jobs Tax Credit). Maryland provides a Job Creation & Recovery Tax Credit of up to $5,000 for hiring certain full-time employees (Department of Labor, Licensing and Regulation). It is important to determine if any state incentive is available to be sure that new employees meet the eligibility requirements and any required applications are timely filed. Multistate employers should evaluate what all states offer if they have flexibility as to where they will hire new employees.

Policy Perspectives

Leading up to passage and signing of HIRE, Congress and the Administration considered various possible approaches for stimulating economic growth. The Administration had suggested a $5,000 per new job tax credit capped at $500,000 (Fact Sheet (PDF)). Other suggestions included additional unemployment benefits, income tax cuts, and incentives for business purchases. Deciding upon the best option is not simple. As summarized in a Congressional Budget Office (CBO) report on the issue:

"Additional policy actions, if well designed, could hasten the economy’s recovery and reduce the loss of output and raise employment during the next few years. However, designing an effective policy is challenging, and policies that provide economic benefits during the next few years may impose economic costs over the longer run." (CBO, Policies for Increasing Economic Growth and Employment in 2010 and 2011, January 2010, page 10).

Payroll tax exemption versus jobs credit: The OASDI tax exemption approach of HIRE has advantages over an income tax jobs credit. A payroll tax exemption provides a more immediate benefit than an income tax credit. Also, not all employers have income tax liabilities (particularly in poor economic times) but all have payroll tax liabilities. A payroll tax exemption can also benefit tax-exempt entities. In addition, the payroll tax exemption might encourage the business to hire new workers sooner rather than later whereas it might not matter when the worker is hired for an income tax credit. Both types of incentives can be enacted on a temporary basis so as only to meet the intended economic stimulus goal.

Weaknesses: A potential problem with any type of incentive is that it can reward behavior that would have occurred anyway. Businesses that already had "help wanted" ads posted receive a bonus from the new payroll exemption. For other businesses, the exemption won't be enough to enable hiring if they are experiencing severe fiscal challenges.

Enough? We have seen several economic stimulus bills since early 2008. We are likely to see additional legislation to help speed up economic recovery. In signing HIRE, President Obama noted:

“While this jobs bill is absolutely necessary, it’s by no means enough.  There’s a lot more that we’re going to need to do to spur hiring in the private sector and bring about full economic recovery — from helping creditworthy small businesses to get loans that they need to expand, to offering incentives to make homes and businesses more energy efficient, to investing in infrastructure so we can put Americans to work doing the work that America needs done.” (White House press release, March 18, 2010).

Conclusion

"Qualified individuals" seeking employment should take advantage of HIRE and note on resumes that they are "qualified." Employers with any ability to hire should certainly consider whether the HIRE incentives help in making that decision. Tax advisers should help employers in ensuring that new or rehired workers are "qualified individuals" particularly where there have been layoffs subsequent to March 18, 2010. Legislators and the Administration await upcoming employment tax reports to see if these new incentives may indeed have accelerated job growth.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.