Tax Incentives Expected to Encourage Hiring; Seasonal Hires Qualify

On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act to encourage employers to hire workers who were previously unemployed for at least 60 days immediately prior to hiring.  Consisting of two parts, a "tax holiday" and an "additional business tax credit," employers may claim these credits beginning on April 1, 2010, with a special catch-up period in the second quarter of 2010 for qualifying first quarter wages paid after March 18. The "tax holiday" exempts employers from a portion of the social security (FICA) taxes normally paid by employers.  Employer-paid FICA taxes consist of a 6.2 percent Old Age Survivor Disability Insurance tax (OASDI), which is paid on wages paid up to the social security wage base of $106,800 for 2010, plus a 1.45 percent Medical Hospital Insurance tax (HI).  The "tax holiday" exempts qualified employers from the OASDI tax, but not the HI tax.  Employers are also still required to withhold the employee's share of social security taxes as well as both shares of Medicare taxes.  Employers may take advantage of the "tax holiday" beginning on April 1, 2010, using Form 941, which has not been released in its final version, for wages earned after March 18, 2010, for any eligible new hire  who begins after February 3, 2010 and before January 1, 2011.  While employers do not have to elect to receive the incentive, employers who are taking advantage of the Work Opportunity Tax Credit (WOTC), which in some cases may be more generous than the "tax holiday," will need to opt out of the HIRE Act provisions. In addition to the "tax holiday," qualified employers may also earn an additional one-time business tax credit of the lesser of $1,000 or 6.2 percent of wages for each of the newly hired workers that the employer retains for at least 52 consecutive weeks.  In order to qualify for the additional tax credit, which can be claimed on the employer's 2011 income tax return, the worker's pay must not significantly decrease in the second half of the year.  Construction employers will also be able to take advantage of these incentives for the many seasonal construction workers who are beginning to return to the workforce.  According to guidance issued by the Internal Revenue Service (IRS), "an employer may apply the tax exemption to wages paid to a rehired employee who is otherwise a qualified employee," which includes the rehiring of seasonal workers as long as they meet all of the other eligibility requirements.  The HIRE Act requires that employers get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than 40 hours for anyone during the 60 day period.   IRS Form W-11 is now available on the IRS website and can be used for that purpose.