Jesse Palmer

In reaction to the high unemployment rate and slow economic recovery, Congress has passed and President Obama is expected to sign the Hiring Incentives to Restore Employment (HIRE) Act of 2010. The Act is intended to promote job growth through payroll tax exemptions as well as tax credits for employers hiring qualifying employees in 2010. This article will examine the hiring incentive in more detail as well as other provisions included in the Act.

Payroll Tax Forgiveness

The HIRE Act provides an exemption to a qualifying employer for the 6.2 percent Social Security tax on the first $106,800 of wages paid to a qualifying employee. The maximum exemption amount per qualifying employee is $6,621.60. The employer is still liable for the 1.45 percent Medicare tax portion of wages paid, and the qualifying employee must still pay his or her share of both the Social Security and Medicare taxes. A qualifying employer is any employer other than the United States and state governments or any political subdivision, with the exception of state colleges and universities.

For the employer to qualify for the Social Security tax exemption, the new employee must meet the following criteria:

• Hired after February 3, 2010, and before January 1, 2011
• Employee certifies by signed affidavit that he or she has not been employed for more than 40 hours during the 60-day period prior to employment
• Does not replace another employee unless the other employee separated from employment voluntarily or for cause
• Employee is not related to the employer or to any individual who owns more than 50 percent of the employer

To account for many employers having already paid the IRS first quarter payroll taxes on qualifying employees, the Act does not apply for wages paid during the first quarter of 2010. Instead, employers will receive a credit on their second quarter payroll tax return. The credit will be equal to the exemption they should have received for first quarter Social Security taxes paid on wages to qualifying employees.

If an employee qualifies for both the payroll tax exemption and the Work Opportunity Tax Credit (WOTC), the Act does not allow the employer to treat the wages paid as qualifying for the WOTC unless the employer elects to forgo the payroll tax forgiveness on those wages. An employer cannot receive both benefits for the same employee.

Retained Workers Tax Credit

Employers may also receive an income tax credit of up to $1,000 per qualified, retained worker if all of the following conditions are met:

• Retained worker is a qualifying employee for purposes of the payroll tax exemption
• Retained worker was employed by employer for at least 52 consecutive weeks
• Retained worker is paid wages during the second half of the 52-week period equal to at least 80 percent of wages paid during the first 26 weeks

Because of the 52-week minimum employment requirement, the tax credit will not be available until the 2011 tax return for calendar year taxpayers. Any unused retained workers credits on the 2011 return cannot be carried back to an earlier tax year.

Extension of Liberalized Small Business Expensing

The HIRE Act also extends businesses’ ability to expense up to $250,000 of the cost of qualifying property, i.e., Section 179 expense, for taxable years beginning in 2010. This amount is reduced dollar for dollar to the extent the cost of qualifying property placed in service during the year exceeds $800,000. In general, qualifying property is depreciable, tangible personal property, including off-the-shelf computer software actively used in a trade or business.

Without further extension, the maximum amount of property eligible for Section 179 expensing in 2011 will drop to $25,000 and will phase out dollar for dollar to the extent total qualifying property additions exceed $200,000.

Revenue Offsets

To offset the cost of the tax incentives, the HIRE Act includes several revenue-raising provisions, mainly in the area of additional withholding and reporting requirements for assets held in foreign accounts. Provisions include:

• Reporting on certain foreign bank accounts. The Act imposes a 30 percent withholding tax on certain income from foreign financial institution accounts held by U.S. persons or U.S.-owned foreign companies. The withholding requirement would be waived if the foreign institution agrees to disclose the identity of any U.S. individual account holder and to annually report to the United States the account balance, gross receipts and gross withdrawals/payments from such account.
• Disclosure of foreign financial assets. Any individual who holds more than $50,000 in a foreign account or other reportable foreign assets must report certain information about these assets with his or her individual income tax return. Failure to adequately disclose could result in a minimum penalty of $10,000, increasing up to $50,000 if the failure is not remedied within 90 days following IRS notification.
• Penalties for underpayments attributable to undisclosed foreign assets. A 40 percent penalty is imposed on tax understatements resulting from unreported income on undisclosed foreign assets. For example, if a taxpayer failed to report $10,000 of interest from a foreign account, resulting in a $4,000 tax understatement, a $1,600 penalty could apply. If, however, the taxpayer can show he or she had a reasonable cause for the underpayment and acted in good faith, the penalty may be withdrawn.
• Extension of statute of limitations. Normally, the IRS may assess only tax, interest and penalties on a return within three years from the date the return was filed. The Act extends the three-year statute of limitations to six years for unreported income exceeding $5,000 that is attributable to one or more reportable foreign assets.

For more information on any of the provisions included in the HIRE Act, please contact your BKD advisor.