HIRE Act Offers Employee Retention Credit to Qualified Employers

The Hiring Incentives to Restore Employment (HIRE) Act provides qualified employers with a new tax credit for retaining certain qualified employees. This provision is intended to encourage businesses and tax-exempt entities to hire and retain employees, and is generally applicable for 2010.

DEFINITIONS

• Qualified Employers are any employer other than the United States, any state, any local government, or any instrumentality of the preceding. However, a qualified employer will include any public higher education institution.
• Qualified Employees who meet the following criteria are considered retained workers for this credit:
  • Begin employment after February 3, 2010, and before January 1, 2011
  • Certify, by signed affidavit under penalties of perjury, that they have not been employed for more than 40 hours during the 60-day period ending on the date the employment began
  • Are not hired to replace another employee of the qualified employer, unless the other employee voluntarily quit or was fired with cause
  • Are not related to the employer in a way that would make him or her ineligible for the work opportunity credit
  • Were employed on any date during a tax year ending after March 18, 2010, and continued in that employment for a period of at least 52 consecutive weeks
  • Earned wages during the last 26 weeks of that period equal to at least 80% of the wages for the first 26 weeks of the period

CREDIT AVAILABLE

For each retained worker, a qualified employer’s general business credit is increased by the lesser of:

• $1,000, or
• 6.2% of the retained worker’s wages during a 52-week consecutive period

TAX YEARS AFFECTED

The credit is available for taxable years ending after March 18, 2010, but is applicable only in the first tax year the retained worker satisfies the 52-week test. Therefore, for calendar-year taxpayers, the credit is first available for the 2011 tax year.

IMPACT ON REPORTING

• The increased business credit is processed through the employer’s income tax return, not through payroll tax returns. The credit cannot be carried back to a year beginning before March 18, 2010.
• The employer’s payroll department will need to track wages of qualified employees to determine who was employed for a period of not less than 52 consecutive weeks, and whose wages for such employment during the last 26 weeks of such period equaled at least 80% of such wages for the first 26 weeks of such period.

PLANNING NOTES

Employers who want to maximize the retention credit must consider several factors:

• The credit applies to part-time as well as full-time workers.
• The credit is closely associated with the new Payroll Tax Holiday provisions. It appears that employment periods that qualify for the Payroll Tax Holiday are included in the 52-week periods required for the retention credit.

If you have any questions about the retention credit, please contact your Cherry, Bekaert & Holland, LLP advisor.