Tax Credit Company president Brandon Edwards calls the HIRE Act a “game changer” for mid-market and smaller companies that now can take advantage of the hiring incentive program.

His company specializes in finding credits that are missed by companies, their accountants, or other employer service companies.

“It’s the broadest hiring incentive program that I’ve seen in my career,” he said. “It opens up new opportunities for companies that are not accustomed to screening employees for tax credits. That would include nonprofits and public universities, and other companies that for one reason or another don’t pay tax taxes because of losses or their corporate structure.”

The Hiring Incentives to Restore Employment Act includes incentives to encourage businesses to hire and retain workers who have been unemployed for at least 60 days. The incentives consist of a 6.2 percent payroll tax exemption for new hires, which is the equivalent of the employer’s share for Social Security tax on wages. The measure is effective for wages paid from March 19, 2010, through the end of the year.

“Tax-exempt organizations are not traditionally interested in credits,” observed Edwards. “But since the payroll exemption incentive is not an income tax credit but is a payroll tax exemption, they should be interested in this.”

The payroll tax exemption applies not only to wages paid to a qualified employee performing services in the employer’s trade or business, but also in activities in furtherance of a tax-exempt organization’s exempt purpose.

The second incentive applies to each qualified employee retained for at least 52 consecutive weeks. It provides a “new hire retention credit” of 6.2 percent of wages paid to the qualified employee over a 52-week period, up to a maximum of $1,000.

As the economic recovery moves forward, these incentives will make it more attractive for businesses to hire new workers. The accounting profession will be dealing with new and sometimes complex rules arising from the Act both as payroll issues, and on tax returns.

“Usually these type of programs are reserved for big companies with dedicated tax and human resources departments,” said Edwards. “The Fortune 500s have been tracking the HIRE Act since before it was signed. But the HIRE Act exempts businesses of all sizes from paying the employer’s share of Social Security taxes for the remainder of the year.”

That translates into as much as $7,621 per qualified employee. If executed properly by an employer, 40 to 60 percent of new hires would qualify, according to Edwards.
“Higher-level white collar employers who would not have participated in WOTC [Work Opportunity Tax Credit] programs will have significant benefits from this,” he said.

The WOTC program rewards employers who hire from certain disadvantaged groups such as food stamp recipients, unemployed veterans and ex-felons.

“With WOTC, there is a big investment and a significant administrative burden because of the paperwork involved. The return for a white collar company is going to be small because the qualification rate is low,” Edwards said. “But the HIRE Act exemption hooks the other way – there’s less administrative burden to the survey and documentation process, and the qualification rate is going to be high.”

A potential issue might arise between choosing the Work Opportunity Tax Credit and the HIRE Act exemption, Edwards noted.

“You’re not allowed to claim or take a WOTC on someone for whom you took a payroll exemption,” he said. “But you can claim the WOTC and the $1,000 HIRE Act retention credit for the same employee. The problem is, with WOTC, the certification process takes six months on average, so you don’t know if someone is certified or not and whether or not to take the exemption.”

Meanwhile, the IRS says that if an employer applied the payroll tax exemption for a qualified employee on Form 941 for one or more prior quarters, the employer would later elect out of the exemption by filing Form 941-X for each affected prior quarter to correct its original return and pay the employer’s share of Social Security tax for each such prior quarter. The employer is then eligible to claim the WOTC on its income tax return.

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