Hiring Incentives to Restore Employment (HIRE) Act Update

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment (HIRE) Act.  This new jobs bill is intended to encourage employers to hire the unemployed.  The HIRE Act creates two new incentives for hiring and retaining unemployed workers:

  1. The employer gets a holiday from paying the business’s share of the OASDI (Social Security 6.2%) tax on the new employee for the rest of 2010, and
  2. The employer gets up to a $1,000 tax credit for keeping the new hire on the payroll for at least one year (52 weeks).

Some additional details about the incentives in the new hiring act include:

  • The 6.2% payroll tax holiday is immediate and increases your business cash flow.  While the business is not required to pay its ½ of the OASDI on the new hire’s wages, it must still pay the Medicare tax on the wages paid to the new employees and all FICA taxes for old employees.
  • To qualify, the employee must have NOT worked for anyone for more than 40 hours in the prior 60 days ending with the day the employee starts work for you, and he must have been hired by you after February 3, 2010.  The employee must sign an affidavit form (New Form W-11) confirming his unemployment status.
  • The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.  An exception may apply if the business had a lay off due to lack of work, and then later rehired due to an increase in work.  You do not need to rehire the laid off individuals, but be careful, there must have been a valid work load reduction.
  • To encourage businesses to retain the new hires for at least 52 consecutive weeks, the HIRE Act also provides a credit up to the lesser of $1,000 or 6.2% of the first $16,129.03 of wages paid for each qualified employee.  This credit will be claimed on the 2011 return.
  • There is no minimum weekly number of hours of work required of the new employee.
  • The maximum payroll tax credit that may be forgiven per employee is $6,622.  The business saves 6.2% on both a $40,000 worker and a $90,000 worker.  There is no maximum dollar amount of forgiveness per business; if you hire 5 qualified employees, your credit could be over $33,000!
  • If a worker is eligible for both the HIRE credit and the “Work Opportunity Tax Credit,” the business can choose one benefit or the other for 2010—no double dipping.
  • There are no HIRE tax breaks if the business hires family members (except spouses).
  • The business can’t simply replace another employee and qualify for the credit unless the replaced employee separated from employment voluntarily or for cause.

Single Member LLC Owner Liable for Unpaid Employer Payroll Tax

Single member limited liability companies seem to be the popular choice these days for small business owners that want limited liability protection without the extra cost  and hassle of an S-Corporation or a two-member LLC.  However, SMLLC owners need to be aware of the court case listed below regarding payroll tax liability as they are personally liable not only for trust fund withholdings taken from employee checks (Code Sec 6672), but also the employer share of payroll taxes.

Medical Practice Solutions, LLC, Carolyn Britton, Sole Member, Petitioner v. Commissioner, Docket No. 14668-07L, 132TC, No. 7 (3/31/09)

Medical Practice Solutions follows several similar rulings in the last few years regarding disregarded entities (SMLLCs) and payroll tax liability, and given the current recession it is very important the single member LLC owners understand that their limited liability protection does not extend to unpaid employer payroll tax liabilities.  In plain terms, employer payroll tax consists of the taxes not deducted from the employees check, which would be taxes like employer Social Security and Medicare tax, federal unemployment tax, and state unemployment tax.  The trust fund withholdings are the amount deducted from the employee’s gross pay that need to be paid to the respective agencies, which business owners have always been personally liable for.

On average, most employers stay current with their payroll tax liability, and most underpayments are the result of calculation errors.  However, over the years I have witnessed several employers get behind on their payroll tax liabilities due to large drops in income, embezzlement and theft, and business owners over-extending themselves in too many business ventures.  In addition, I have seen many businesses close their doors that had to deal with significant amounts of debt and/or were facing a lawsuit.  If you have a SMLLC or are thinking of starting one, you should definitely talk to your attorney about this.  If it is of significant concern, you may consider adding a spouse or friend to the LLC to take advantage of the credit ordering rules available to a two-member LLC.

I would also recommend using a payroll service provider or a CPA that will get you in the discipline of depositing your payroll tax timely.  Whether you have a SMLLC or not, the IRS is not a creditor you want to put off as the penalties involved with payroll tax payments are very substantial.

Making Work Pay Credit & New Withholding Tables

If you are a small employer that calculates your payroll manually – please be advised that new withholding tables have been released and any payroll on or after today, April 1st, 2009, have to be calculated using the new tables.

Withholding Tables

IRS IR-2009-13 – Information on the change

For those of you who use QuickBooks, be sure you download the latest update and that your subscription is current.  You will not really notice much a change in preparing the payroll, but you can be sure your employees will start asking questions as it is all of the news today.

For those of you that are married with a double income and adjusted gross income of more than $150k – this could actually reduce your withholding in certain circumstances.  More to come on this as it develops.  The timing of this is horrible for CPAs!  We are in the final leg of long hours changes to payroll preparation is the last thing we want to deal with.

By the way, this is not an April Fools joke.  I only wish this whole “stimulus” bill was only a joke.