According to President Obama, “”It is the first of what I hope will be a series of jobs packages that help to continue to put people back to work.”
Major hiring provisions of the Act include a payroll tax holiday for an employer that hires a displaced worker and a retained worker credit if the employer continues that employment for at least 52 weeks. The Act also includes a business-stimulation provision that increases the small-business expensing amounts and limits for 2010 and provides a new election for issuers of qualified tax credit bonds.
To pay for these tax benefits, the Act imposes new tax withholding requirements for certain offshore financial accounts, as well as expanded reporting requirements, penalties and assessment periods for such accounts. It also delays the effective date of worldwide interest allocation rules and accelerates certain estimated tax payments for very large corporations.
Payroll Tax Holiday
The HIRE Act exempts certain wages from the employer’s portion of one of two FICA taxes: the Old Age, Survivors and Disability Insurance, or OASDI. Significantly, the tax benefit of this new employer incentive is immediate. It puts money into a business’ cash flow immediately as the tax is simply not collected in the first place.
Further, there is no minimum number of hours that the new employee must work for the employer to be eligible and there is no limit on the dollar amount of payroll taxes per employer that may be exempted from tax.
This exemption applies to wages paid by qualified employers to qualified employees with respect to employment after March 18, 2010. In this context, a qualified employer is a for-profit or not-for-profit employer that is not the U.S. government, a state or a political subdivision of a state (e.g., a local government). An exception is made for public institutions of higher education, which also qualify for the new tax incentive.
It is important to note that the tax exemption affects only the employer’s portion of the OASDI, which is equal to 6.2 percent of an employee’s wages up to an annually-adjusted wage base of $106,800 for 2010. Therefore, the maximum benefit to an employer is $6,621.60 per employee.
Under the Act, qualified employees are not required to be full-time employees but they must meet all of the following conditions.
Their employment begins after February 3, 2010 and before January 1, 2011, although any wages paid to them between February 3 and March 18 are not eligible for the exemption.
They certify under penalty of perjury that they were not employed for more than 40 hours during the 60-day period ending on the date they begin the new employment.
They are not employed to replace another employee unless that employee left voluntarily, was terminated for cause, or was terminated as a result of certain circumstances (such as a plant closing due to lack of demand).
They are not related to the employer in a way that would disqualify them for the Work Opportunity Tax Credit.
Relation to the Work Opportunity Tax Credit (WOTC): Wages paid to a qualified employee under the payroll tax holiday provision will not qualify for the WOTC during the one-year period beginning on the employee’s hire date. However, in cases where the WOTC is more beneficial, the employer may elect out of the payroll tax holiday on an employee-by-employee basis. The WOTC is generally equal to 40 percent of qualified first-year wages up to $6,000, generating a maximum credit of $2,400 per employee.
Railroad Retirement Tax Holiday
The HIRE Act provides for a railroad retirement tax holiday that is similar in many respects to the OASDI tax holiday. It is effective for compensation paid after March 18, 2010.
Retained Worker Credit
As an additional incentive, the HIRE Act provides employers with a tax credit for retaining the workers it hires, up to a maximum credit amount of $1,000 per employee.
A retained worker is an employee of a qualified employer (as determined by the payroll tax holiday rules) who was employed on any date during the tax year and was employed for a continuous period of at least 52 weeks. Also, the employee’s wages during the last 26 weeks of that period must be at least 80% of the wages paid for the first 26 weeks.
Small-Business Expensing Limits
The HIRE Act returns the enhanced expensing rules for small businesses under Section 179 of the tax code to their higher pre-2010 amounts. This increases the maximum amount of qualifying capital expenditures―such as purchases of machinery and equipment―that businesses can expense for 2010 from $134,000 to $250,000. The expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets, up from the pre-Act phase-out of $530,000.
For 2011, the dollar limitation is scheduled to decrease to $25,000 and the phase-out begins at $200,000.
Compliance and Reporting of Foreign Financial Accounts
To fund its tax benefits, the HIRE Act institutes a number of new anti-abuse measures intended to deter U.S. persons from hiding assets in overseas financial accounts―including new withholding requirements and expanded reporting requirements, penalties and assessment periods.
Generally, the Act’s new 30 percent tax withholding requirement applies to payments made to foreign financial institutions by U.S. persons and U.S. foreign entities. It is effective for payments made after December 31, 2012, but does not apply to obligations outstanding as of March 18, 2012.
Persons with depository or custodial accounts at foreign financial institutions―or certain other foreign assets―must attach disclosure statements to their income tax returns if the total value of their foreign assets exceeds $50,000 during the tax year. This new reporting requirement applies to tax years beginning after March 18, 2010. (For more information on reporting requirements other than these disclosures to the IRS, refer to our previous article Have a Foreign Bank Account, Brokerage Account, Hedge Fund or Mutual Fund?)
Also for tax years beginning after March 18, 2010, the Act creates a new 40 percent penalty for understating a tax liability because of an undisclosed foreign financial asset. The related period of limitations for assessing taxes is six years, if the gross income that was omitted exceeds $5,000.
Corporations with assets of at least $1 billion will have certain of their estimated tax payments accelerated. Also, issuers of specific types of tax credit bonds may elect to issue their bonds in a manner that provides them with a subsidy from the IRS to cover a portion of the interest due to bondholders.
The Act provides additional infrastructure funding that will enable the Highway Trust Fund to continue various highway and mass transit programs through the end of the year.