Sasser Sefton Tipton & Davis

Sasser, Sefton, Tipton & Davis, P.C.
Montgomery, Alabama

Two new laws provide significant tax incentives for employers. The Hiring Incentives to Restore Employment Act ("HIRE Act") provides a partial payroll tax exemption for certain new hires and a retention credit for eligible employees retained for 52 consecutive weeks. In addition, the new health care reform legislation provides a tax credit to qualified small employers that provide employees with health care coverage. Incentives are available for both for-profit and nonprofit employers.

HIRE Act Incentives

President Obama signed the HIRE Act, Pub. L. No. 111-147, into law on March 18, 2010. The HIRE Act provides two incentives for employers to hire and retain new workers who lacked full-time employment for at least 60 days immediately before being hired. The first incentive is a partial payroll tax exemption. For each eligible employee hired after February 3, 2010, and before January 1, 2011, the employer qualifies for a 6.2% payroll tax incentive, which effectively exempts the employer from its portion of Social Security taxes on wages paid to the eligible employee after March 18, 2010. To take the credit, the employer must obtain a statement, given under penalty of perjury, from the eligible employee that the employee was either unemployed during the 60-day period before starting work or worked less than 40 hours total during that 60-day period. The Internal Revenue Service has released a new Form W-11 that employers can use to satisfy the employee statement requirement. This incentive is available to businesses, agricultural employers, nonprofits, and public colleges and universities but is not available to federal, state, and local government employers or to household employers.

The second incentive available under the HIRE Act is a new hire retention incentive. For each eligible employee hired and retained for at least 52 consecutive weeks, employers will qualify for a general business tax credit. The new hire retention credit is equal to 6.2% of the wages paid to the eligible employee during the first 52 weeks of employment, but the credit is capped at $1,000.00 per eligible worker. This credit is a credit against income tax liability (and, therefore, is generally unavailable to nonprofit or tax-exempt employers). The new hire retention credit will be claimed on the employer’s 2011 income tax return.

Health Care Reform Legislation

Soon after the HIRE Act became law, President Obama signed the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, on March 23, 2010. One week later, the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, was also signed into law. Collectively, these two acts are more commonly known as the health care reform legislation. The health care reform legislation contains a significant new tax incentive for certain small employers that provide health care coverage to their employees. The incentive takes the form of a tax credit and is available both to for-profit and nonprofit employers, although the calculation of the credit differs for nonprofit and for-profit organizations.

The incentive in the health care reform law is available only to qualified small employers. For purposes of the incentive, a small employer is one with fewer than 25 full-time equivalent employees. To be eligible for this incentive, the employer’s average annual wages must be less than $50,000.00 per full-time equivalent employee. In addition, the employer must pay at least 50% of the health care premiums for participating employees. The maximum credit is available to employers with 10 or fewer full-time equivalent employees and for employers with average annual wages of $25,000.00 or less. As the number of full-time equivalent employees and the size of annual average wages rise, the incentive phases out. The incentive disappears once full-time equivalent employees reach 25 or once average annual wages reach $50,000.00.

The credit is available to nonprofit employers as well as to for-profit employers, but the details of the incentive are different for each type of employer. If the employer is a for-profit business, for each year from 2010 through 2013, the maximum credit is 35% of the employer’s health care premium expense, but the credit is not refundable and may not exceed the employer’s income tax liability. However, if the employer is a tax-exempt organization, then for each year from 2010 through 2013, the maximum credit is 25% of the employer’s health care premium expense. Also, for a tax-exempt employer, the credit is refundable but the credit may not exceed the sum of income and Medicare taxes withheld and the employer’s share of Medicare taxes. (This does not affect payroll tax withholding during the year.) In 2014, the size of the maximum credit will increase to 50% for businesses and to 35% for nonprofits. Basically, the credit amounts to an income tax credit for businesses and either an income or payroll tax credit (although technically an income tax credit) for nonprofits calculated as a percentage of the employer health care premium contribution.

Conclusion

Employers should investigate the tax incentives available under the HIRE Act and the recent health care reform legislation. The HIRE Act provides payroll and income tax credits to employers that hire and retain certain previously unemployed workers. In addition, qualified small employers that provide health care coverage to their employees may receive further tax credits under the new health care reform legislation. Together, these incentives can help for-profit and nonprofit employers expand their workforces and provide employee benefits at reduced expense.

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