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.
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LLC vs. S-Corporation, Round 1

When setting up a business and deciding on entity type, most people are looking for 1) liability protection and 2) tax savings – specifically lowering self-employment tax liability.  For small businesses, the two best options are the LLC or the S-Corporation, and many tax or legal professionals seem to advocate for one team or the other so it is hard to know what entity is truly best for your business.  Well, I am not your advisor and I have been on both teams, so hopefully I can provide you with some balanced information and after a couple rounds, hopefully we will have a winner for your business…

Will the business own appreciating property like real estate?

If your business has anything to do with real estate rentals or owning and managing commercial or residential property, then LLC is the early winner.  This is vitally important – you should never put real estate into a corporation.  If a CPA or tax practitioner recommends this for a new small business, I would consider it malpractice.

Basically, if you put real property into an S-Corporation, then you are going to have a taxable event if you transfer it out of the corporation in the future and you will pay tax based on the fair market value of the property at that time.  I could tell you some horror stories on this issue, but trust me – if you have a residential or commercial property, put it in an LLC.
LLCs are perfect for real estate as you can move the property in and out of the entity without any taxable events.  Plus, they are much easier to setup, administer, and report for tax purposes.  Even better, if you have one owner, you can use the single-member LLC for your real estate and then the tax reporting is simplified so that you only have to complete a Schedule E as part of your personal return.

How many owners will the business have?

This is another important question to look at upfront, as it can result in a knock out in round one.  If you will be the sole owner of the business, then your options are limited to the following:

Single-member LLC (SMLLC)

The only LLC offering for the single-owner business is a great option for easy setup, administration, and tax reporting; however, it is going to cost you in the form of self-employment tax.  To the IRS, The SMLLC is no different than a sole proprietorship – in fact, the SMLLC is reported on Schedule C just like a sole proprietorship.  Unfortunately, this means that you will pay self-employment tax (15.4%) on the entire amount of your net taxable earnings.  This can really add up – especially if you are a consultant with few expenses and/or minimal capital asset needs.  After a few years of paying a hefty tax bill, most business owners are willing to put up with some extra administration and tax prep costs in exchange for a much lower tax bill via use of the S-Corporation while paying themselves a reasonable wage.

S-Corporation

The big winner for single-owner businesses is clearly the S-Corporation as most business owners can end up saving thousands.  With an S-Corporation, you do not pay self-employment tax on the earnings, BUT the owner must pay himself a “reasonable” salary, which means you are paying payroll taxes on the Federal and state level.  Usually, if you sit down with a CPA and lay this all out, they should be able to give you a ballpark of your tax savings each year; however, there are costs related with this:

  • Legal costs – it is not cheap to setup, but I would never suggest a D.I.Y for an S-Corporation.  Get it setup right and avoid legal problems later.
  • Accounting Fees – keeping your accounting data on a spreadsheet may not cut it anymore – especially if you use a lot of credit cards and loans.  Be prepared to pay a bookkeeper or an accountant to get your books setup right so that the tax preparation goes smoothly.
  • Tax Prep fees – S-Corporation returns require much more work and typically range from $750 – $2000 or higher depending on complication.  Plus, you now have to file quarterly payroll tax returns and payroll to process, which can run you about $95/quarter even with one employee using ADP, Paychex, of your CPA.

If your savings are still substantial after factoring in these costs, then you should definitely go with the S-Corporation, but make sure you have a good lawyer and a good CPA that you like as you will be talking to them frequently for the first few years.

Well, round 1 is in the bag and we are tied at 1 a piece.  In round 2 we will deal with issues for businesses with more than owner.

Just remember – never choose an entity for your business without consulting a CPA and lawyer as every situation and business is unique.  Give me a call at 503.224.8844 if you need a CPA or a lawyer to help you with your new business.

Reasonable Wage For S-Corporation Shareholders

For those of you with S-Corporations, now is the time of year to look at your wage for the year-to-date as well as start the planning for 2009.  A “reasonable wage” needs to be paid to more than 2% shareholders in S-Corporation, and there is still time to make changes without incurring payroll tax penalties.

This is a crucial issue as an S-Corporation return without wages to the shareholder is pretty much a red flag to the IRS – especially if you took distributions during the year.  The law requires a “reasonable” wage be paid, but what is “reasonable”?

I have been through several IRS audits where this was brought into questions and the IRS answer is to look to the online salary guides and they are always going to look to the high side of the scale.  If you are in a state unemployment audit, they will magically select a wage equal or greater than the unemployment tax limit (in OR – $30,200 for 2008).  I believe most S-Corporation shareholders should be somewhat aggressive and argue for the lower side of the salary guide scale, but it does still need to be a reasonable figure that you can make a case for.   Basically, it should be the wage you would have to pay to hire someone to do your job.  In some industries, this is fairly easy to calculate using salary guides; however, many industries are very unique and salary guide data is not going to be as readily available.

At this point in the year, you can pay yourself just about any amount needed provided you pay your payroll tax monthly.  However, if you wait until December or only want to pay payroll tax quarterly, then the maximum you can pay yourself without incurring payroll tax penalties is $16,339.00 (assuming you do not have any Federal or State withholdings and you are the only employee).  Why such a specific number?  Well, the IRS payroll tax rules state that when your payroll tax liability is less than $2,500 for the quarter that you do not have to deposit monthly and can pay the tax due with the report, and $16,339 in wages gives you $2,499.88 in liability.  That means you can pay yourself this payroll amount (or reclassify distributions) as late as 12/31/07 and you will not have to pay the payroll tax liability until 1/31/08.

If you have taken funds out of your S-Corporation during the year (distributions) and have not paid any wages, please pay yourself some wages before year-end and save yourself potential problems with the IRS or your state unemployment agency.

For more information, refer to IRS Publication 15 and contact your CPA or accountant.  For payroll processing, feel free to contact our firm, Adrienne Derryberry at Paychex, or Dan Burke or Jaymie Steck at ADP.