Few small businesses are taking advantage of the HIRE Act’s 2010 payroll exemption and 2011 credit, says tax-credit consultant Brandon Edwards, CEO of Tax Credit Co.

By: Karen E. Klein

The $18 billion jobs bill signed by President Barack Obama on Mar. 18 represents “the democratization of tax credits,” says Brandon Edwards, president of Los Angeles-based consulting firm The Tax Credit Company. Despite the legislation’s simplicity and availability to every U.S. business, Edwards estimates that 90 percent of small companies are unaware of the Hiring Incentives to Restore Employment (HIRE) Act, outlined at this page on the IRS Web site. Edwards says that companies can save as much as $7,621 per qualified employee under HIRE. He spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.

Karen E. Klein: The HIRE Act is part of a jobs bill passed in March. What’s different about it?

Brandon Edwards: In a lot of ways it’s unprecedented, particularly for small businesses. Many tax credits are so complicated and specific that smaller companies don’t qualify or don’t have the ability to pursue them. This bill spurs hiring by American businesses and every company in the country is eligible for it. Even small businesses can reasonably expect to collect benefits from it.

What are the benefits and how does a small business get them?

There are two incentives. The first is a payroll tax exemption that applies immediately and lasts through Dec. 31, 2010. The second is a $1,000 federal, dollar-for-dollar tax credit that will be available in the 2011 tax year. The way to qualify is to hire someone who has worked less than 41 hours in the prior 60 days and keep them on your payroll for at least 52 weeks.

Let’s go through the hiring piece first. How does an employer determine if a new employee qualifies for the HIRE program?

A lot of people are out of work, so a lot of people are going to qualify. In this job market, hiring someone who’s been out of work for two months doesn’t mean you’re hiring a less-qualified employee. The projected qualification rate is 15 percent to 30 percent, but we’re seeing about 40 percent to 60 percent of new hires qualifying in certain areas of the country. It’s pretty easy to understand, although there are some gray areas. For instance, new employees don’t have to have been collecting unemployment before they’re hired. So a new graduate coming out of college is likely to qualify.

The key is that new employees have to have been out of work, or have worked less than one full-time week for 60 days, before they start employment with you. It’s important to keep in mind that the 60-day period is measured from the employment start date, not from the date when you first contact someone or interview them for a job.

Is there any concern from employers about asking whether a job candidate has been out of work?

It’s something that people are nervous about, but they shouldn’t worry. It’s very simple and part of a standard interview to ask for recent work history. And this is a program where the federal government is specifically encouraging business to hire people to meet the criteria.

What kind of paperwork is involved and are payroll providers handling it?

There’s an affidavit, called a W-11 form, that the employee has to sign to attest to the fact that they qualify and the employer must retain that in their records. There’s no requirement for certification or for the form to be filed with the IRS.

Payroll companies have had to make sure that they can accommodate this program. But small employers who hire a qualified employee should double check to make sure their payroll company is not paying full payroll tax for that person. When quarterly payroll taxes are filed, there’s an adjustment you make to show that you have an exempt employee.

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From IowaPolitics.com:

Washington, DC – Today, Congressman Bruce Braley (IA-01) introduced a bill to cut payroll taxes for businesses that hire unemployed workers. The Back to Work Extension Act extends a provision of the HIRE Act that provides employers a payroll tax break if they hire workers who were previously unemployed.

“Creating jobs is my top priority and this program is already proven to put Iowans back to work,” said Braley. “Between February and December of 2010, Iowa businesses hired more than 104,000 workers who are eligible for this tax cut. This tax credit works – and we must extend it now to give employers incentives to create jobs and hire unemployed workers.”

The Back to Work Extension Act will exempt small businesses from paying the employer’s share of the Social Security tax for up to one year through December 31, 2011 – if they hire workers who have been unemployed for more than 60 days prior to employment. Employers who keep eligible employees on the payroll for 52 consecutive weeks will receive an additional $1,000 tax credit. The previous exemption expired on December 31, 2010.

Rep. Braley introduced a similar bill in the 111th Congress, H.R. 6152. Text of the new bill is not yet available.

The following is from a transcript of a CNBC town hall meeting in which President Obama was interviewed by John Harwood:

September 20, 2010 Monday

REMARKS BY PRESIDENT BARACK OBAMA AT A CNBC TOWN HALL;
SUBJECT: JOBS AND THE ECONOMY MODERATOR: JOHN HARWOOD, CNBC;
LOCATION: THE NEWSEUM; WASHINGTON, D.C.

PRESIDENT OBAMA: I do want to be fair about your other point, which is the costs of workers. One of the things — one of the laws that we passed this year was the HIRE Act, which said we’ll give you a tax break if you hire a new worker, so to try to reduce some of those costs. And in some high-cost places, like New York City, the cost for the average worker may be even higher than it is if you are in — in some other places.

MR. HARWOOD: Why not a payroll tax holiday for exactly the issue that he mentioned?

PRESIDENT OBAMA: Yeah. Well, this is something that we’ve examined. And you know, we are going to be working with businesses to see does it make sense for us to initiate some additional incentives in order to hire.

The one thing that I want to make clear about, though, is — is our health-care bill didn’t substantially add to employers’ health- care costs. It exempts from any kind of costs for employers folks who have 50 employees or less.

What we’ve said is, if you’ve got more than 50 employees, then you should be able to give them health care. And we will give you tax incentives; basically, we’ll pay for a — we’ll give you a break that’s as much (as ?) a third of your costs for their health-care premiums.

And the reason we’re doing that is because if you’re not paying for it, then the taxpayers are paying for it. We’re all paying for it because, on average, these emergency room visits for people who don’t have health insurance add up to an extra thousand dollars on each of our premiums who do have health insurance.

MR. HARWOOD: Did I understand you just to say a moment ago that you are continuing to examine a payroll tax holiday and may be open to that as a way of spurring hiring?

PRESIDENT OBAMA: I — John, I think here’s what you can rest assured, is we are willing to look at any idea that’s out there that we think will help. But we’ve got to do so in a responsible way. We’ve got to make sure that whatever it is that we’re proposing gives us the best bang for the buck. A lot of ideas that look good on paper, when you start digging into them it turns out that they’re more complicated and — and they may end up not working the way they’re supposed to.

And we’ve got to be self-critical. There are times where, for example, on the — in the housing market, we were very successful in keeping the housing market alive at a time when it had completely shut down. But a lot of folks are still losing their homes because they’ve lost their jobs. They’re just having trouble making their mortgage payments. And what we’ve been trying to do is to get the banks to work with the borrower to see: Can you adjust the mortgage so that if they’re willing to make a payment, that they can stay in their homes?

The following press release was issued by Congressman Bruce Braley (D-Iowa):

Washington, DC – Rep. Bruce Braley (D-Iowa) announced today he has introduced legislation to extend a provision of the HIRE Act that provides employers a payroll tax break if they hire previously-unemployed workers. The tax cut, based on Braley’s Back to Work Act, exempts employers from paying their share of payroll taxes if they hire an employee who has been unemployed for more than 60 days prior to hiring. According to the US Treasury Department, more than 53,733 Iowa workers hired between February and June 2010 are eligible for the Braley tax cut.

“As we continue to strengthen our economy, we need to invest in programs that are proven to create jobs,” Braley said. “Between February and June of this year, Iowa businesses hired more than 53,000 workers who are eligible for this tax cut. We need to continue giving employers incentives to create jobs and hire unemployed workers, and this tax cut does exactly that.” The Back to Work Extension Act will exempt small businesses from paying the employer’s share of the social security tax for up to one year through December 31, 2011, if they hire workers who have been unemployed for more than 60 days prior to employment. Employers who keep eligible employees on the payroll for 52 consecutive weeks will receive an additional $1,000 tax credit. The previous Back to Work Act exempted employers from paying payroll taxes through December 31, 2010. If enacted before December 31, 2010, the Back to Work Extension Act will provide employers a 12-month exemption for hiring previously unemployed workers. Employees hired after January 1, 2011, will be eligible through December 31, 2011.

Our Company President, Brandon Edwards, is quoted in a recent article (registration required) in Staffing Management magazine wherein he clears up some confusion surrounding capture of the HIRE Act tax credit, as well as giving insight into the value that can be realized by screening job applicants at the point of hire:

“Larger employers are screening everybody to find out whether the credit is applicable,” he says.

However, fewer than 10 percent of small employers are taking advantage of the act so far, according to Edwards. “Either they don’t know about it or haven’t set up a screening process or don’t have a dedicated person on staff to work on it,” he says.

Further, concerning qualification rates, Mr. Edwards says:

Data from The Tax Credit Co. show that the number of new hires considered eligible may be higher than initially thought. “Originally, one projection forecast that 15 percent to 30 percent of new hires would qualify, but now we’re seeing that over 50 percent of job seekers are qualified,” Edwards says.

The full text of the article is below. A downloadable, embedded version of the document is also available.

An Incentive to HIRE
Vol. 6 No. 3
The HIRE Act uses tax credits to encourage companies to employ out-of-work job seekers.
7/1/2010 By Diane Cadrain

The Hiring Incentives to Restore Employment (HIRE) Act—the $18 million jobs bill signed in March that provides employers with two kinds of tax credits in exchange for hiring folks who have been out of work—could bring financial relief to a large number of companies.
The HIRE Act exempts employers from the company’s 6.2 percent share of Social Security tax on wages paid to qualified employees hired between Feb. 3, 2010, and Dec. 31, 2010. The new hires must have worked fewer than 41 hours in the prior 60 days. In these economic times, that covers a lot of people.
The act also allows companies to take a one-time general business tax credit of 6.2 percent of wages paid to each qualified employee who stays on the job for at least 52 consecutive weeks, up to a maximum of $1,000 per qualified employee.
Because the HIRE Act applies to broad categories of employees, employers across the board stand to benefit from its provisions.
Who Is Eligible?
Employers are interested in taking advantage of the act’s provisions, if the number of queries to the Society for Human Resource Management’s HR Knowledge Center is any indication. They are asking about the eligibility of various categories of potential hires, including:
Employees on military termination leave. They are eligible “as long as they’re not getting paid during that period,” says Brandon Edwards, president of Los Angeles-based consulting firm The Tax Credit Co.
Adds William Weissman, a specialist in tax advice for employers and a shareholder in the Walnut Creek, Calif., office of law firm Littler Mendelson: Employers need to understand how the HIRE Act interplays with the Uniformed Services Employment and Reemployment Rights Act (USERRA). “USERRA gives military members who return from active duty a rehire right with their civilian employers. It basically gives them a 90-day window to go back to work,” he explains.
“However, until they actually return to their civilian employer, they are not ‘employed’ once discharged from their active-duty services,” he continues. Thus, if they remain unemployed for 60 days, or otherwise work no more than 40 hours in that period, they would qualify for the HIRE Act.
Laid-off workers with rehire rights. “The IRS has said that HIRE is applicable to employees with rehire rights, as long as the employee is otherwise qualified—that is, the person has worked for less than 41 hours during the prior 60 days,” says Tom Rebel, a partner in the Atlanta and Fort Lauderdale offices of law firm Fisher & Phillips. Rebel notes that employers are already legally required to take back those with rehire rights.
Visa holders. “Visa holders are eligible,” Weissman says. “Nothing exempts or disqualifies visa holders. They don’t even have to be citizens. They just have to meet the 40/60 requirement.”
Edwards adds that “If there were no Social Security taxes due for that employee—non-resident aliens, certain students—there would be no benefit from the payroll tax exemption. But the company could still be eligible for the $1,000 retention credit if it retains the person for 52 weeks.”
Interns. “It does apply to them,” Rebel says, citing a frequently asked questions fact sheet about qualified employees posted on the IRS’s web site. “There’s no minimum age requirement for a qualified employee,” he adds.
Game Changer
“Most tax credits apply to specific groups of employees, and employers don’t always have a dedicated person on staff to pursue them,” Edwards says. The Work Opportunity Tax Credit, for example, encourages employers to hire people who are on food stamps or who have criminal records.
The HIRE Act is different, Edwards maintains, because “it could be used for a CFO or an executive. This is across the board.”
Data from The Tax Credit Co. show that the number of new hires considered eligible may be higher than initially thought. “Originally, one projection forecast that 15 percent to 30 percent of new hires would qualify, but now we’re seeing that over 50 percent of job seekers are qualified,” Edwards says. The data relate primarily to nonexempt hires.
In short, “The HIRE Act changes the game,” he says.
What Companies Benefit?
Edwards says large companies are using the HIRE Act—or thinking of using it—”because it represents millions” of dollars in savings. “Larger employers are screening everybody to find out whether the credit is applicable,” he says.
However, fewer than 10 percent of small employers are taking advantage of the act so far, according to Edwards. “Either they don’t know about it or haven’t set up a screening process or don’t have a dedicated person on staff to work on it,” he says.
Bill Rys, tax counsel at the National Federation of Independent Business, a small-business association, says that small employers already planning to hire for a position welcome the tax credits but that they are unlikely to ratchet up their hiring as a result of the law. “In terms of being an incentive to hire a new worker,” he explains, the provision is “of limited help. The tax relief is too small relative to the expense of adding a new employee.
“Most important,” he says, “a business is going to hire a new employee if it has work for that employee to do. With sales and demand continuing to be low among small businesses, there is less work” available for new employees.
________________________________________
Diane Cadrain is an attorney who has been writing about employment law issues for more than 20 years. She is a member of the Human Resource Association of Central Connecticut.

An Incentive to HIRE

Treasury Department Assistant Secretary for Economic Policy Alan Krueger has released an Op-Ed piece where he writes about the positive impact of the HIRE Act on the nation’s economic recovery, specifically concerning private-sector hiring. Says Mr. Krueger:

Analysis suggests that the HIRE Act is working. According to recent data, employers hired some 6.9 million unemployed workers who are eligible for HIRE Act tax relief through July. Moreover, preliminary evidence suggests that employers have already claimed tax credits for about one in every four eligible workers hired. This reduces the payroll tax payments employers send to the federal government, leaving them with more money to expand their businesses.

Also, The Treasury Department published an updated report quantifying the number of newly hired workers who qualify under the HIRE Act – that number stands at 6.9 million currently

The full text of Mr. Krueger’s Op-Ed and the The Treasury Department HIRE act report are available after the jump.

By Alan B. Krueger

Labor Day is an occasion to honor and celebrate American workers. The opportunity to work in a decent job gives people and society benefits beyond the income it generates. Conversely, unemployment causes workers and their families distress beyond their loss of income.

Job growth was weak throughout the 2000s, and the past few years unquestionably have been difficult for American workers, as the financial crisis and subsequent recession destroyed jobs at an alarming rate. When President Barack Obama took office, the country was losing 750,000 jobs a month, and more than 7.5 million jobs have been lost since the recession began in late 2007. Although the economy has started to recover and layoffs have declined from their peak, hiring remains too slow to provide enough jobs for the growing workforce.

Since day one, the Obama administration’s top priority has been to create the conditions needed for the private sector to create jobs for American workers. Although major legislation, like the Recovery Act – which the nonpartisan Congressional Budget Office estimates has saved or created 2 million to 4.8 million jobs – gets most of the attention, the administration and Congress have taken numerous additional steps to support job growth and help unemployed Americans.

These efforts include assisting states to retain teachers and pay Medicaid costs, the “cash for clunkers” program, an unprecedented expansion of unemployment insurance benefits, and business tax incentives. In addition to all of this support, the administration is actively pursuing legislation for additional tax cuts and better access to capital for small businesses.

A notable example of a targeted measure to boost the economy is the Hiring Incentives to Restore Employment, or HIRE, Act of 2010. In his state of the union address, President Obama called on Congress to create a tax incentive to encourage private sector employers to increase their payrolls. Congress responded with the HIRE Act, which exempts private employers from paying the employer portion of Social Security payroll taxes for newly hired workers who have been unemployed for 60 days or longer. As an added incentive, employers can receive up to an additional $1,000 tax credit for each of the newly hired workers they retain for 52 weeks.

The HIRE Act expires at the end of this year, so employers have a stronger incentive to increase their hiring sooner rather than later.

Analysis suggests that the HIRE Act is working. According to recent data, employers hired some 6.9 million unemployed workers who are eligible for HIRE Act tax relief through July. Moreover, preliminary evidence suggests that employers have already claimed tax credits for about one in every four eligible workers hired. This reduces the payroll tax payments employers send to the federal government, leaving them with more money to expand their businesses.

While not all of these jobs were created solely because of the HIRE Act, economist Mark Zandi of Moody’s Analytics estimated that one-quarter of a million additional jobs will be added because of the HIRE Act. Even as the unemployment rate remains stubbornly high, employers across the country are claiming the HIRE Act tax credits and hiring individuals who were previously out of work.

It is not just the numbers that point to the success of the HIRE Act. The HIRE Act switches the focus from job loss to job creation. Many businesses are excited by the opportunity to hire workers they may not have been able to hire otherwise.

After being forced to impose a hiring freeze in the beginning of 2009, James Barba, the CEO of the Albany Medical Center in Albany, NY, said the HIRE Act “gave us immediate tax relief … of hundreds of thousands of dollars, and frankly, made my job considerably easier in deciding that we would hire people again.”

The HIRE Act supports the hiring of workers who have faced the greatest difficulty in the job market, and gives employers more of an incentive not only to hire them but also to keep them on the payroll. The program encourages private sector job growth, which is essential to get the economy back on track.

It is an example of the kind of temporary, targeted and responsible economic policy that has been the hallmark of this administration.

That so many eligible unemployed workers have been hired so far is a testament to the dynamism of the American job market and the resourcefulness of American workers and businesses even in a time when unemployment is unacceptably high. That gives us another reason to celebrate the American worker on this Labor Day.

The Treasury Department Report

Updated Estimates of Newly Hired Employees Eligible for HIRE Act Tax Exemption

Representative Paul Tonko (D-NY) has introduced H.R. 6105 to extend the benefits of the HIRE Act through 6/30/2011. The language of the House bill is essentially the same as Senator Schumer’s S. 3623.

Here are additional details on Senator Stabenow’s “Americans Want to Work Act” HIRE Act modifications:

HIRE Act Background: The HIRE Act, signed into law earlier this year, provides two new tax incentives for employers to hire unemployed workers. Under the HIRE Act, businesses that hire Americans who have been out of work for at least 60 days are exempt from paying their 6.2 percent share of Social Security payroll taxes for all new hires up to the FICA wage cap of $106,800. To promote long-term employment, the HIRE Act also provides an additional $1,000 general business tax credit for each worker retained for at least one year.

Americans Want to Work Act Provisions: The bill includes two key provisions that apply to all states:

Extends the successful HIRE Act Payroll Tax Exemption for one year, through the end of 2011.

Doubles the general business tax credit, from $1,000 to $2,000, for businesses that hire (and retain for 52 weeks) someone who has exhausted all unemployment benefits. This is applicable to anyone who has exhausted all unemployment benefits or that is eligible for Tier 5. This would be effective at the date of enactment.

There is now a serious effort underway to extend the payroll tax exemption benefit of the HIRE Act.

On July 21 Senator Schumer introduced S. 3623 which would extend the period of the exemption through July 2011:

(1) IN GENERAL- Section 3111(d) of the Internal Revenue Code of 1986 is amended–

(A) by striking `with respect to employment during the period beginning on the day after the date of the enactment of this subsection and ending on December 31, 2010,’ in paragraph (1) and inserting `during the applicable period with respect to employment’,

(B) by striking `January 1, 2011′ in paragraph (3) and inserting `July 1, 2011′,

(C) by redesignating paragraph (5) as paragraph (6) and by inserting after paragraph (4) the following new paragraph:

`(5) APPLICABLE PERIOD- For purposes of paragraph (1), the applicable period is–

`(A) with respect to any qualified individual who begins employment after February 3, 2010, the period beginning after March 18, 2010, and ending on December 31, 2010, and

`(B) with respect to any qualified individual who begins employment after July 22, 2010, the period beginning on the day after the date of the enactment of this paragraph and ending on June 30, 2011.’,

Meaning that for qualified employees hired between Feb. 3 and July 22, 2010 businesses would receive the tax exemption through Dec. 31, 2010 and for employees hired after 7/22/10 the exemption would be through 6/30/2011.

On August 4, Michigan Senator Debbie Stabenow, along with prominent co-authors such as Senator Schumer and Leader Harry Reid, introduced S. 3706, “The Americans Want to Work Act.” According to the Senator’s press release:

The Americans Want to Work Act extends through 2011 the successful HIRE Act tax credit, signed into law earlier this year, to encourage businesses to hire workers. The HIRE Act cuts payroll taxes for businesses that hire workers who have been out of work for longer than 60 days and also gives them a $1,000 general business tax credit for each worker employed for at least a year. The Stabenow bill also doubles the tax credit to $2,000 if businesses hire workers who have totally exhausted their unemployment benefits.

Concerning qualified employers, the IRS added three new questions and answers:

(05/06/10) QR9: Some businesses use the services of workers who are employees of a temporary agency. Can the temporary agency claim the payroll tax exemption for its qualified employee working at a client business?
A-QR9: The temporary agency can apply the exemption with respect to wages paid to a qualified employee of the temporary agency. This is determined based on when the employee begins employment with the temporary agency, and not based on when the employee begins work at a client business of the temporary agency.

(05/06/10) QR10: If a client business hires an employee who previously provided services to the business as an employee of a temporary agency, is the client business entitled to apply the payroll tax exemption?
A-QR10: The client business can apply the exemption if the worker is a qualified employee when he or she begins employment with the client as its employee. That is, the worker must not have worked as an employee for any business (including the temporary agency) for more than 40 hours in the 60 days prior to beginning employment with the client business.

(07/23/10) QR11: Does the payroll tax exemption apply for purposes of the Railroad Retirement Tax Act (RRTA)?
A-QR11: Yes, the payroll tax exemption applies with respect to a qualified employer’s liability for the portion of the Tier 1 tax under RRTA that corresponds to social security tax.

There are eight new questions and answers related to qualified employees:

(07/23/10) QE17: When does an individual “begin employment” for purposes of the HIRE Act?
A-QE17: The HIRE Act does not address when an individual begins employment; therefore, general principles relating to employment apply. Under these general principles, employment includes the establishment, maintenance, and termination of the employer-employee relationship, all of which depend on the facts and circumstances. Accordingly, an individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is first established.

In the case of an individual who was previously employed by the qualified employer and whose employment was terminated, for purposes of determining qualified employee status, the individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is reestablished.

(07/23/10) QE18: Can an employee who has been on furlough, standby status or temporary layoff be a qualified employee when he or she resumes active status?
A-QE18: An individual in this circumstance can be treated as a qualified employee only if the furlough, standby status, or temporary layoff constitutes a termination of employment and, upon reestablishment of the employment relationship, the requirements to be a qualified employee are satisfied. Whether the employment relationship has terminated is based on facts and circumstances. See QE17, above, for a determination of when employment begins.

(07/23/10) QE19: Does work performed as a self-employed individual count in determining whether an individual has been employed for 40 hours or less during the 60-day period ending on the date the individual begins employment for purposes of qualified employee status?
A-QE19: No. Only work performed as an employee counts in determining whether an individual has been employed for 40 hours or less during the 60-day period.

(07/23/10) QE20: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual who terminated employment voluntarily?
A-QE20: Yes, as long as the employee is otherwise a qualified employee.

(07/23/10) QE21: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to gross misconduct?
A-QE21: Yes, as long as the employee is otherwise a qualified employee.

(07/23/10) QE22: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to poor performance?
A-QE22: Yes, as long as the employee is otherwise a qualified employee.

(07/23/10) QE23: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was previously terminated in a reduction in force due to lack of work?
A-QE23: Yes, as long as the employee is otherwise a qualified employee. In addition, the payroll tax exemption can apply to an employee whose employment was previously terminated in a reduction in force due to lack of work, and who is later rehired, as long as the rehired employee is otherwise a qualified employee.

(07/23/10) QE24: Can a minor sign a HIRE Act employee affidavit, such as Form W-11, which is required to be signed under penalties of perjury?
A-QE24: Yes.