HIRE Act's Hiring Tax Incentives

Last week, the President signed H.R. 2847 the Hiring Incentives to Restore Employment (HIRE) Act. As the title of the bill indicates, the purpose is to increase private sector hiring by giving tax incentives for employers.

The highest impact tax provision on the new law is the hiring incentive for employers. Code section 3111 is amended and subsection (d) is added and reads:

“(1) IN GENERAL- Subsection (a) shall not apply to wages paid by a qualified employer 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, of any qualified individual for services performed--

‘(A) in a trade or business of such qualified employer, or

‘(B) in the case of a qualified employer exempt from tax under section 501(a), in furtherance of the activities related to the purpose or function constituting the basis of the employer’s exemption under section 501.”

The incentives are available for both private and public sector employers. When a qualified employer (defined in section 3111(d)(2)) hires a qualified individual (defined in section 3111(d)(3)) the employer is exempted from paying the employer’s share of social security taxes on the employee for 2010.

To qualify, the employee must be hired after February 3, 2010 and before January 1, 2011. The employee must not have worked more than forty hours in the last sixty days. What is interesting is in section 3111(d)(3)(C), a qualifying employee cannot replace another employee unless the employee leaves “voluntarily.” This requirement is very intriguing in its vagueness and will certainly lead to mischief and litigation. For example, what does it mean to replace? Will employers simply change the title of the position of the new employee? Even among very similar individuals, skills and qualifications are not identical and thus there may be a case to be made that John Doe 1 is not replacing John Doe 2 because John Doe 1 has a distinct skill, etc. Further, there will certainly be disagreement about what “voluntary” means. A common practice among law firms is to not explicitly fire an employee, but suggest/inform the employee that he will not be made partner and he is best served to find employment elsewhere. Technically, this appears to be voluntary but substantively, it appears to not be voluntary. It will be interesting to see how this language is interpreted.

There is also an increase in the general business tax credit for the retention of such employees for at least one year at specified wage levels. Code section 51(c) is amended and allows an increase in the credit for such employees if they are retained at specified wage levels.

If these new employees are retained for fifty-two weeks, Code section 38(b) is amended and provides for a tax credit of either $1,000 or 6.2 percent of the wages paid to the qualified retained worker during a fifty-two week period.

This will impact both part-time workers and new full time workers. The new law does not require a minimum number of hours. It is likely that most employers will max out this credit at $1,000 because the 6.2 percent threshold will be reached when wages are $16,129.

There are issues that will likely keep labor and employment attorneys busy for a while. Classifications of employees versus contractors, specifically changing these classifications to qualify for this credit will need to be addressed. If an individual perform services for a business but is property classified as in independent contractor (see Revenue Ruling 87-41), the individual is not employed by the business. Therefore, expect to see employers taking proactive steps to reclassify independent contractors as employees to receive this credit.

A couple additional observations based on the new law. The payroll tax exemption does not cover the employer portion of Medicare payroll taxes, just the 6.2 percent Social Security payroll taxes. Further, this exemption will provide immediate tax relief while but will also decrease the employer’s business expense deductions (because payroll taxes are ordinary and necessary) during the tax year.

A final curious point is the tax credit for retaining an employee for fifty-two weeks. By classifying this credit as a general business credit under section 38(b), the credit can be carried forward or carried back. This carryover is key because it will give employers the incentive to retain employees even if fiscal year 2010 will end in the red.

Here is the full text of H.R. 2847.