Introduction
As of May 7, 2010, our nation’s unemployment rate remained at 9.9%. Economists have predicted that it will remain high for months and possibly the next couple of years to come. With 8.5 million jobs having been eliminated in the past few years, returning to a normal state of unemployment will be quite challenging for businesses, people and the government to achieve. Recently, we did receive some good news in that the last quarter resulted in a drop in unemployment claims and 240,000 new jobs. In addition, the federal government is hard at work to try to change the tide in unemployment. Along with healthcare reforms passed, Congress has enacted The Hiring Incentives to Restore Employment (HIRE) Act in an attempt to alleviate unemployment. While it is much lesser known than the Patient Protection and Affordable Health Care Reconciliation Act that was hotly contested and publicized, this Act is also extremely important and has great benefits for employers.
Exemption
HIRE was enacted on March 18, 2010 and contains two major provisions: 1) an exemption from the Old Age Survivor’s and Disability Tax, and 2) a credit under the General Business Tax Credit for employees retained for 52 weeks and longer.
As mentioned, the first major provision of the Act pertains to hiring unemployed workers. According to the IRS website, employers, who hire qualifying employees, will be excused from paying that employer’s share of Old Age Survivor’s and Disability Insurance (OASDI) taxes on employees hired February 3, 2010 to December 31, 2010. However, the actual exemption period applies to the wages paid to the qualified employee after March 18, 2010 until December 31, 2010. Medicare amounts and other withholding taxes (including state and federal income taxes and the employee’s share of OASDI) must still be withheld and paid. Future Social Security benefits will not be affected by this exemption for the employee. Under the second part of the Act, focusing on employee retention, if the qualified employee is employed by the employer for a time span of 52 weeks or longer, there is an additional credit of $1,000 that applies for the employer under the General Business Tax Credit.
Qualified Employee
To be a qualified employee, the person must not have worked more than 40 hours total in the past consecutive 60 days prior to being hired. If the employee has worked so much as 40 hours and one minute in the past consecutive 60 days before being hired, that employee is ineligible.
Application
Additionally, a qualified employee must either sign an affidavit form W-11 or an affidavit containing the same information. The employee signs this form under penalty of perjury. Quite simply, it is an affidavit stating, “I certify that I have been unemployed or have not worked for anyone for more than 40 hours during the 60 day period ending on the date I began employment with this employer.” It is not filled with the IRS, but must be retained as a record in case the IRS wishes to review the employer’s compliance. If the record form is not present, the employer can face the loss of the exemption plus interest plus penalties. It is strongly recommended that all employees hired after February of this year be required to complete the form.
Section 179 Expensing
Contained within the HIRE Act, section 179 expensing has been extended one additional year through 2010. As such, for the tax year beginning in 2010, the dollar limitation is, once again, $250,000 on qualifying investments which includes most depreciable business property, including equipment, machines, etc. The investment limitation is still $800,000 and the deduction is reduced dollar-for-dollar for every dollar over $800,000 until the $1,050,000 is reached, where the deduction is completely phased out.
Conclusion
The government is doing exactly what it should be doing in order to fix the job market and drive employment back down to a more normal rate of between 5% and 5.5%. Cutting taxes and focusing on stimulus spending will achieve that result. Because of the actions taken, it is an exciting time to be in business. Taxes are low, finance rates are low, the estate tax laws are due to be changed and with the section 179 and employment credits, businesses should begin to hire back employees. As such, business succession and its planning should be actively engaged in today if you are in business and have not already done so.
By: Dr. Bart Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors