The HIRE Act of 2010.

• Author: McGowan, John R.
• Position: Hiring Incentives to Restore Employment Act of 2010

In an effort to reduce persistent high unemployment and to encourage economic growth, on March 17, 2010, the Senate passed the Hiring Incentives to Restore Employment (HIRE) Act, (1) and President Barack Obama signed the legislation into law on March 18. The new legislation, which should be of great interest to businesses, seeks to achieve these goals by providing employers tax incentives to hire and retain new workers and to invest in new equipment.

The two most important provisions of the HIRE Act are a tax credit provision and a limited "payroll tax holiday" provision, both of which encourage companies to hire unemployed workers in 2010. The act also enhanced expense treatment for new equipment placed into service in 2010 by increasing the Sec. 179 expense deduction amount for 2010. Other features of the act include an extension of the refundable tax credit rules that apply to Build America Bonds to most qualified tax credit bonds and an increase in funding for highway and transit programs.

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To finance the hiring incentives in the HIRE Act, Congress passed several offsetting revenue increasing and compliance provisions, including a comprehensive set of measures to reduce offshore noncompliance. Some of the act's main foreign compliance and revenue raising provisions include new reporting rules for certain foreign bank accounts along with disclosure statements for "specified foreign financial assets." This article discusses the major parts of the HIRE Act (the payroll tax holiday and the $1,000 tax credit for retained workers), reviews the expanded tax credit provisions for most qualified tax credit bonds, and describes the new foreign reporting requirements and the associated penalties for noncompliance.

Payroll Tax Holiday in 2010 for Hiring Unemployed Workers

The Federal Insurance Contributions Act (FICA) imposes two taxes, the old age, survivors and disability insurance (OASDI) tax and the Medicare hospital insurance (HI) tax. These taxes are imposed on employers for wages paid to employed workers and on employees for wages received. The OASDI tax rate is 6.2% on wages up to an annually adjusted wage base ($106,800 for 2010). (2) The HI tax rate is 1.45% on all wages, regardless of amount. (3) The HIRE Act forgives the employer's portion of the OASDI payroll tax for certain unemployed individuals the employer hires. The HIRE payroll tax holiday applies to employers in the private and not-for-profit sectors; it does not apply to public-sector employers other than public institutions of higher education.

Requirements to Qualify for Payroll Tax Holiday

The payroll tax holiday enacted in the HIRE Act is an incentive for employers to expand employment opportunities. To qualify, an individual must begin employment with a qualified employer after February 3, 2010, and before January 1, 2011. (4) The individual must certify by signed affidavit, 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 the individual begins employment with the qualified employer. (5) However, the employee need not work for a minimum number of hours before the employer can qualify for the payroll tax holiday.

The HIRE Act also states that the employer will not qualify for the payroll tax holiday if the employer hired the individual to replace another employee unless that other employee separated from employment voluntarily or for cause. (6) However, the Joint Committee on Taxation Report points out that an employer would qualify if a factory was closed due to lack of demand and an employee was hired when business picked up. (7) The payroll tax holiday is also not available for hiring a relative such as the qualified employer's child or descendant of a child, stepchild, sibling, stepbrother, stepsister, parent, stepparent, niece, nephew, uncle, aunt, or in-law. (8)

Amount of the Payroll Tax Holiday

Under the HIRE Act, the 6.2% OASDI tax on employers does not apply to wages paid between March 19, 2010, and December 31, 2010, by a qualified employer to eligible employees. However, the employer must still pay the 1.45% Medicare (HI) portion of the employer's tax. As a result, the amount of tax forgiven per employee cannot exceed $6,621.60 because the OASDI tax applies to only the first $106,800 of wages paid in 2010 ($106,800 x 6.2% = $6,621.60). Employers claim the exemption from their share of employees' OASDI tax on Form 941, Employer's Quarterly Federal Tax Return. The payroll tax holiday does not affect the employee's portion of the employment tax and also does not affect the self-employment tax paid by self-employed individuals.

Special Rule for First Calendar Quarter of 2010

The payroll tax holiday does not apply for wages paid during the first calendar quarter of 2010 (i.e., wages paid between March 19 and March 31, 2010). The amount by which the OASDI tax imposed on a qualified employer would have been reduced (if the payroll tax holiday provisions applied) for wages the employer paid during the first calendar quarter of 2010 is treated as a payment against the OASDI tax imposed on the qualified employer for the second calendar quarter of 2010. (9) The payment is treated as made on the date that the employer's second-quarter OASDI tax is due. This rule gave the IRS time to issue guidance about the payroll tax holiday and gave employers time to adjust their payroll systems accordingly. On May 18, the IRS posted a new version of Form 941 and its instructions reflecting this treatment of first-quarter 2010 wages.

Coordination of Payroll Tax Holiday with WOTC: Election Out

A qualified employer may elect not to have the payroll tax holiday apply. (10) Unless the employer elects out of the payroll holiday, wages paid or incurred to a qualified individual will not qualify for the work opportunity tax credit (WOTC) during the one-year period beginning on the date the individual was hired. (11)

However, the Joint Committee on Taxation Report indicates that the employer may make the election on an employee-by-employee basis. (12)

The WOTC is generally 40% of qualified first-year wages of up to $6,000, for a maximum credit of $2,400 per worker. (13)

As a result, it is in many cases more valuable than the payroll tax holiday, especially for low-wage employees. The payroll tax holiday is equal to 6.2% of wages and applies only to wages paid through December 31, 2010. However, the WOTC is harder to qualify for because an agency must certify that the employee is a member of one of the groups targeted by the WOTC.

Example 1: A Corp. hires B on April 5, 2010, for $7.25 an hour. B works for A for 1,480 hours during 2010, earning $10,730 in wages. Assuming B is an eligible worker for purposes of both the WOTC and the payroll tax...