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President Obama signed into law H.R. 2847, the “Hiring Incentives to Restore Employment Act (HIRE)". Section 101 of the Act provides a payroll tax holiday for hiring certain unemployed workers after February 3, 2010 and before January 1, 2011. Section 102 of the Act provides a business tax credit for retention of certain newly hired workers in 2010. Your companies may be able to take advantage of these two temporary provisions.
We have placed the applicable statutory language at the bottom for your reference and review. Below is a summary of the two provisions:
Payroll Tax Holiday
FICA tax forgiveness began on March 19, for “qualified employers” who hire a “qualified individual” after February 3rd, 2010 and before January 1st, 2011.
A qualified employer is defined as any employer other than the government.
A qualified individual is defined as someone who “certifies by signed affidavit, under penalties of perjury, that such individual has not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment.”
In addition, a qualified individual cannot be “employed by the qualified employer to replace another employee of such employer unless such other employee separated from employment voluntarily or for cause." An explanation provided by the Joint Committee on Taxation states that rehiring laid-off workers or filling positions of laid-off workers with new workers is permitted.
Lastly, a qualified individual cannot be a relative of the employer as defined in IRC section 51(i)1.
The law provides that employers may not claim FICA forgiveness for their qualified hires in the first quarter of 2010. Instead, employers are required to accrue such tax saving for the first quarter and credit it toward their second quarter FICA taxes.
Treasury Regulations implementing the HIRE Act will be issued soon, but in the meantime employers may proceed by adhering to the text of the Act.
Until Treasury issues guidance implementing the new law, employers can establish their claim for the FICA forgiveness and employee retention credits as follows:
- Employers should have each individual, for whom FICA forgiveness is claimed, complete a signed affidavit certifying, under penalties of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date of commencing employment; and
- Employers should certify for each qualified individual they hire that: (1) the individual is being hired to perform services in a trade or business of the employer; (2) the individual is not being employed to replace another employee unless such other employee separated voluntarily or for cause; and (3) the employer is in compliance with IRC section 51(i)1 regarding prohibition on hiring of relatives.
Employee Retention Tax Credit
To claim the Employee Retention Credit (ERC), employers must document: (1) 52 consecutive weeks of employment with the employer by a qualified individual, and (2) wages during the last 26 weeks of employment being not less than 80 percent of wages during the first 26 weeks of employment.
The ERC is $1,000 or 6.2 percent of wages paid to the employee over the 52-week period, whichever is less. As a rule of thumb, if weekly wages average more than $310 over the period, ERC is $1,000. If weekly wages average less than $310, ERC must be computed as .062 times total wages for the 52 weeks.
The ERC is an addition to the General Business Credit of IRC Section 38 and follows the rules of Section 38 with a single exception----any excess business credit resulting from the employee retention credit may not be carried back. It may, however, be carried forward.
An employer may claim either the HIRE provisions or the Work Opportunity Tax Credit (WOTC), but not both. Thus, individual companies must compare the tax benefits associated with the WOTC (maximum annual benefit of $2,400/worker) and the two HIRE provisions in determining which provides the superior tax benefit.
TITLE I--INCENTIVES FOR HIRING AND RETAINING UNEMPLOYED WORKERS
SEC. 101. PAYROLL TAX FORGIVENESS FOR HIRING UNEMPLOYED WORKERS.
(a) In General- Section 3111 is amended by adding at the end the following new subsection:
`(d) Special Exemption for Certain Individuals Hired in 2010-
`(1) IN GENERAL- Subsection (a) shall not apply to wages paid by a qualified employer with respect to employment during the period beginning on the day after the date of the enactment of this subsection and ending on December 31, 2010, of any qualified individual for services performed--
`(A) in a trade or business of such qualified employer, or
`(B) in the case of a qualified employer exempt from tax under section 501(a), in furtherance of the activities related to the purpose or function constituting the basis of the employer's exemption under section 501.
`(2) QUALIFIED EMPLOYER- For purposes of this subsection--
`(A) IN GENERAL- The term `qualified employer' means any employer other than the United States, any State, or any political subdivision thereof, or any instrumentality of the foregoing.
`(B) TREATMENT OF EMPLOYEES OF POST-SECONDARY EDUCATIONAL INSTITUTIONS- Notwithstanding subparagraph (A), the term `qualified employer' includes any employer which is a public institution of higher education (as defined in section 101(b) of the Higher Education Act of 1965).
`(3) QUALIFIED INDIVIDUAL- For purposes of this subsection, the term `qualified individual' means any individual who--
`(A) begins employment with a qualified employer after February 3, 2010, and before January 1, 2011,
`(B) certifies by signed affidavit, under penalties of perjury, that such individual has not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment,
`(C) is not employed by the qualified employer to replace another employee of such employer unless such other employee separated from employment voluntarily or for cause, and
`(D) is not an individual described in section 51(i)(1) (applied by substituting `qualified employer' for `taxpayer' each place it appears).
`(4) ELECTION- A qualified employer may elect to have this subsection not apply. Such election shall be made in such manner as the Secretary may require.
`(5) SPECIAL RULE FOR FIRST CALENDAR QUARTER OF 2010-
`(A) NONAPPLICATION OF EXEMPTION DURING FIRST QUARTER- Paragraph (1) shall not apply with respect to wages paid during the first calendar quarter of 2010.
`(B) CREDITING OF FIRST QUARTER EXEMPTION DURING SECOND QUARTER- The amount by which the tax imposed under subsection (a) would (but for subparagraph (A)) have been reduced with respect to wages paid by a qualified employer during the first calendar quarter of 2010 shall be treated as a payment against the tax imposed under subsection (a) with respect to the qualified employer for the second calendar quarter of 2010 which is made on the date that such tax is due.'.
(b) Coordination With Work Opportunity Credit- Section 51(c) is amended by adding at the end the following new paragraph:
`(5) COORDINATION WITH PAYROLL TAX FORGIVENESS- The term `wages' shall not include any amount paid or incurred to a qualified individual (as defined in section 3111(d)(3)) during the 1-year period beginning on the hiring date of such individual by a qualified employer (as defined in section 3111(d)) unless such qualified employer makes an election not to have section 3111(d) apply.'.
(c) Transfers to Federal Old-Age and Survivors Insurance Trust Fund- There are hereby appropriated to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund established under section 201 of the Social Security Act (42 U.S.C. 401) amounts equal to the reduction in revenues to the Treasury by reason of the amendments made by subsection (a). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Trust Fund had such amendments not been enacted.
(d) Application to Railroad Retirement Taxes-
(1) IN GENERAL- Section 3221 of the Internal Revenue Code of 1986 is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:
`(c) Special Rate for Certain Individuals Hired in 2010-
`(1) IN GENERAL- In the case of compensation paid by a qualified employer during the period beginning on the day after the date of the enactment of this subsection and ending on December 31, 2010, with respect to having a qualified individual in the employer's employ for services rendered to such qualified employer, the applicable percentage under subsection (a) shall be equal to the rate of tax in effect under section 3111(b) for the calendar year.
`(2) QUALIFIED EMPLOYER- The term `qualified employer' means any employer other than the United States, any State, or any political subdivision thereof, or any instrumentality of the foregoing.
`(3) QUALIFIED INDIVIDUAL- For purposes of this subsection, the term `qualified individual' means any individual who--
`(A) begins employment with a qualified employer after February 3, 2010, and before January 1, 2011,
`(B) certifies by signed affidavit, under penalties of perjury, that such individual has not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment,
`(C) is not employed by the qualified employer to replace another employee of such employer unless such other employee separated from employment voluntarily or for cause, and
`(D) is not an individual described in section 51(i)(1) (applied by substituting `qualified employer' for `taxpayer' each place it appears).
`(4) ELECTION- A qualified employer may elect to have this subsection not apply. Such election shall be made in such manner as the Secretary may require.
`(5) SPECIAL RULE FOR FIRST CALENDAR QUARTER OF 2010-
`(A) NONAPPLICATION OF EXEMPTION DURING FIRST QUARTER- Paragraph (1) shall not apply with respect to compensation paid during the first calendar quarter of 2010.
`(B) CREDITING OF FIRST QUARTER EXEMPTION DURING SECOND QUARTER- The amount by which the tax imposed under subsection (a) would (but for subparagraph (A)) have been reduced with respect to compensation paid by a qualified employer during the first calendar quarter of 2010 shall be treated as a payment against the tax imposed under subsection (a) with respect to the qualified employer for the second calendar quarter of 2010 which is made on the date that such tax is due.'.
(2) TRANSFERS TO SOCIAL SECURITY EQUIVALENT BENEFIT ACCOUNT- There are hereby appropriated to the Social Security Equivalent Benefit Account established under section 15A(a) of the Railroad Retirement Act of 1974 (45 U.S.C. 231n-1(a)) amounts equal to the reduction in revenues to the Treasury by reason of the amendments made by paragraph (1). Amounts appropriated by the preceding sentence shall be transferred from the general fund at such times and in such manner as to replicate to the extent possible the transfers which would have occurred to such Account had such amendments not been enacted.
(e) Effective Dates-
(1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this subsection shall apply to wages paid after the date of the enactment of this Act.
(2) RAILROAD RETIREMENT TAXES- The amendments made by subsection (d) shall apply to compensation paid after the date of the enactment of this Act.
SEC. 102. BUSINESS CREDIT FOR RETENTION OF CERTAIN NEWLY HIRED INDIVIDUALS IN 2010.
(a) In General- In the case of any taxable year ending after the date of the enactment of this Act, the current year business credit determined under section 38(b) of the Internal Revenue Code of 1986 for such taxable year shall be increased, with respect to each retained worker with respect to which subsection (b)(2) is first satisfied during such taxable year, by the lesser of--
(1) $1,000, or
(2) 6.2 percent of the wages (as defined in section 3401(a)) paid by the taxpayer to such retained worker during the 52 consecutive week period referred to in subsection (b)(2).
(b) Retained Worker- For purposes of this section, the term `retained worker' means any qualified individual (as defined in section 3111(d)(3) or section 3221(c)(3) of the Internal Revenue Code of 1986)--
(1) who was employed by the taxpayer on any date during the taxable year,
(2) who was so employed by the taxpayer for a period of not less than 52 consecutive weeks, and
(3) whose wages (as defined in section 3401(a)) for such employment during the last 26 weeks of such period equaled at least 80 percent of such wages for the first 26 weeks of such period.
(c) Limitation on Carrybacks- No portion of the unused business credit under section 38 of the Internal Revenue Code of 1986 for any taxable year which is attributable to the increase in the current year business credit under this section may be carried to a taxable year beginning before the date of the enactment of this section.
(d) Treatment of Possessions-
(1) PAYMENTS TO POSSESSIONS-
(A) MIRROR CODE POSSESSIONS- The Secretary of the Treasury shall pay to each possession of the United States with a mirror code tax system amounts equal to the loss to that possession by reason of the application of this section (other than this subsection). Such amounts shall be determined by the Secretary of the Treasury based on information provided by the government of the respective possession.
(B) OTHER POSSESSIONS- The Secretary of the Treasury shall pay to each possession of the United States which does not have a mirror code tax system amounts estimated by the Secretary of the Treasury as being equal to the aggregate benefits that would have been provided to residents of such possession by reason of the application of this section (other than this subsection) if a mirror code tax system had been in effect in such possession. The preceding sentence shall not apply with respect to any possession of the United States unless such possession has a plan, which has been approved by the Secretary of the Treasury, under which such possession will promptly distribute such payments to the residents of such possession.
(2) COORDINATION WITH CREDIT ALLOWED AGAINST UNITED STATES INCOME TAXES- No increase in the credit determined under section 38(b) of the Internal Revenue Code of 1986 against United States income taxes for any taxable year determined under subsection (a) shall be taken into account with respect to any person--
(A) to whom a credit is allowed against taxes imposed by the possession by reason of this section for such taxable year, or
(B) who is eligible for a payment under a plan described in paragraph (1)(B) with respect to such taxable year.
(3) DEFINITIONS AND SPECIAL RULES-
(A) POSSESSION OF THE UNITED STATES- For purposes of this subsection, the term `possession of the United States' includes the Commonwealth of Puerto Rico and the Commonwealth of the Northern Mariana Islands.
(B) MIRROR CODE TAX SYSTEM- For purposes of this subsection, the term `mirror code tax system' means, with respect to any possession of the United States, the income tax system of such possession if the income tax liability of the residents of such possession under such system is determined by reference to the income tax laws of the United States as if such possession were the United States.
(C) TREATMENT OF PAYMENTS- For purposes of section 1324(b)(2) of title 31, United States Code, rules similar to the rules of section 1001(b)(3)(C) of the American Recovery and Reinvestment Tax Act of 2009 shall apply.
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Payroll Tax Holiday and Retention Tax Credit
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