The cautious whispers about economic recovery keep coming, and if your business is starting to pick up, you may be thinking about adding to your staff. The timing could not be better. In March, President Obama signed the Hiring Incentives to Restore Employment Act into law. This new law offers employers like you two potential tax benefits for hiring workers who are currently unemployed.
The first tax break offsets the employer's portion of Social Security taxes on the new employee's wages from March 19, 2010, to Dec. 31, 2010. So, the 6.2 percent of the employee's wages you would normally contribute to Social Security stays in your business. This does not alter the employee's future Social Security benefits. You are still responsible for withholding the employee's share of payroll and income taxes, and paying the regular Medicare taxes.
The second tax benefit from the HIRE Act allows you to claim a general business tax credit for each new hire still employed after one year, as long as that employee's wages did not significantly decrease over the course of the year. The credit is worth up to $1,000, or 6.2 percent of the employee's total wages, whichever is less. Since you can only claim the credit after the employee completes one full year of service, you would claim the credit on your 2011 tax return. A bit of a delayed benefit, but $1,000 is nothing to sneeze at.
Between these two breaks, you can save thousands of dollars in taxes. Better still, if you need to do a lot of hiring, there is no limit on the number of employees for whom you can claim the credits.
Of course, with anything involving the IRS, there are rules and restrictions. Here is what you need to know:
In order to qualify, your new employee must have worked fewer than 40 total hours during the 60 days prior to being hired. Unfortunately, you cannot claim HIRE tax breaks for any employee who is related to you. (You can hire your relatives, you just can't claim the tax breaks.) There are no age restrictions, and the workers are not required to ever have been employed previously. So if you hire a new high school or college graduate who has never held a job before, it counts.
What if the recession forced you to lay off employees, but you are in a position to hire now? You can certainly rehire your former staff members and claim the credit, so long as they were out of work for 60 days; you also have the option to hire new people without hurting your ability to claim the credit. You cannot terminate an existing employee just to hire a new one and claim the credit. On the other hand, if an employee leaves voluntarily or is terminated for cause, then you are in the clear and can reap those tax rewards.
The IRS has created new forms (Form W-11) that each new hire will need to complete, stating that he or she was, indeed, unemployed during the time in question. Employers will claim the Social Security tax benefit on their federal employment tax return (Form 941), usually filed quarterly; the $1,000 employee retention credit will be claimed on your 2011 business returns. Revised forms are available at IRS.gov .
It is important to note that if you are not already in a position to increase your staff, these tax breaks will not offset the additional costs of new employees. The HIRE Act's purpose was simply to incentivize hiring people who are already out of work, thereby reducing the number of unemployed workers and helping to stimulate the economy.
Of course, if you are not completely certain you need to hire new employees, don't rush into anything. While these tax benefits are valuable, they certainly will not offset the costs of hiring an unnecessary employee. However, once your business is booming and you are ready to expand your staff, make your move. These tax breaks will expire at the end of 2010.
Roni Lynn Deutch is known as The Tax Lady for a reason: She has two decades of practical experience resolving IRS tax problems and preparing taxes for taxpayers nationwide. Consequently, she has become a well-known media personality and one of the few go-to tax experts in the country.