A new tax break may have a significant impact on businesses hiring employees this summer season.
On March 18, the HIRE Act was signed into law. This law will alleviate employers expenses related to matching Social Security tax contributions this year.
Jenny Dougherty, business consultant with the Small Business Development Center, said that this will be a significant help for area employers, especially seasonal businesses including the resorts and tourism industry.
“(The HIRE Act) will get employees back to work and help small businesses hire employees,” Dougherty said.
One of the main tax breaks in the HIRE Act is to eliminate the matching contribution for qualified employees. The tax break only applies to Social Security tax, not to Medicare tax.
One of the expenses of having employees is the cost to match, dollar for dollar, the amount of Social Security tax withheld from an employee’s paycheck, which is equal to 6.2 percent of the employees gross wage. For instance, if an employee is paid $500, the Social Security tax withheld is $31. But employers need to send $62 to the IRS - the $31 withheld plus another $31 matching contribution.
Only specific employees qualify for the tax break.
Anyone who is hired after Feb. 3 and has not been employed for 40 hours during the immediate 60 days prior to the date they are hired qualifies. The 40 hours is a total for the 60-day period, not 40 hours per week. Current employees do not qualify. However, if a business hires someone back who worked last year and they have not been employed for 40 hours during the immediate 60 days prior to the date they are rehired, they qualify. A person who has never been employed qualifies. The person cannot be a relative of the employer.
Even though the act covers employees starting Feb. 3, the tax break only covers wages paid after March 18 through the end of 2010.
To obtain the benefits, employees fill out form W-11 certifying that they have not been employed for 40 hours during the immediate 60 days prior to the date they are hired. Employers keep this in their files and do not need to send it to the IRS.
Form 941 has been modified to add a special line for this exemption. For wages paid in the first quarter, employers can take the credit on the second quarter 941.
A second provision of the HIRE Act is geared toward employee retention.
If the qualifying employee works for 52 consecutive weeks starting with their hire date, the employer can claim a $1,000 tax credit on their 2011 income tax return. The main caveat is that in the second 26 weeks the employee has to earn at least 80 percent of what they earned in the first 26 weeks of employment.
So if a business hires someone on May 1, the money they earn between November 2010 and April 2011 has to be at least 80 percent of the amount they earned between May and October.
Even if an employee does not meet the requirements of the second tax break, an employer still gets the first break related to the matching of Social Security taxes.
“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,” said IRS Commissioner Doug Shulman.
Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.
For more information, see www.irs.gov or contact a business’s accountant.
