Taking Credit: Understanding Available Employment Tax Credits

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Understanding Available Employment Tax Credits

Our nation’s unemployment rate hovers at nine percent and monthly job losses continue to rise. That has generated discussions in Washington about innovative fiscal policy instruments, such as job creation tax credits, to help stimulate labor demand. In 2010, Washington took action and signed the Hiring Incentive to Restore Employment (HIRE) Act into law, which provided two new tax benefits to employers. The first perk was a payroll tax exemption which Congress is trying to extend past its 2011 year-end expiration date. The second benefit of the HIRE Act was the New Hire Retention Credit, which provides general business tax credits for hiring and retaining qualified employees for a consecutive 52 weeks.

Such a credit has been tried only once before at the federal level, with the 1977-78 “New Jobs Tax Credit” that offered corporations with taxable income a credit proportional to the increase in net payroll employment above 102 percent of its previous year’s employment level. The 1977 law was considered a success. Studies found that it increased employment in the construction, trucking, wholesale, and retail sectors between 0.66 percent and 2.95 percent. Furthermore, firms that reported knowing about the credit experienced three percent higher employment growth than other firms.

Fast forward to today – how can a business qualify for the New Hire Retention Credit?

The New Hire Retention Credit allows up to a $1,000 credit to qualified employers. The credit applies to businesses that hired and retained workers for a consecutive 52-week period.

To be a qualifying retained worker, the employee:

  • Must begin employment after February 3, 2010, and before January 1, 2011
  • Must complete Form W-11 or a similar affidavit stating the employee was not employed more than 40 hours during the 60-day period ending on the hire date
  • Cannot be employed to replace another employee, unless the previous employee was terminated for cause (including downsizing) or voluntarily terminated
  • Cannot be related to the employer

The credit is the lesser of $1,000 or 6.2 percent of the employee’s wages paid for the consecutive 52-week period. The credit can only be claimed if the employee’s wages for the second 26-week period are not less than 80 percent of the employee’s wages for the first 26-week period.

For calendar-year taxpayers, the credit will be claimed on the 2011 tax return.

For fiscal-year taxpayers, the credit can be claimed in the tax year in which the 52-week requirement is met. The earliest date to file a return claiming the credit would be fiscal years ending after February 3, 2011.

Partnerships and S corporations calculate the credit and ultimately pass it to the owners through Schedule K-1.
The most common question about the New Hire Tax Credit is related to the required W-11, or other affidavit, stating the new hire was, in fact, unemployed for 60 days prior to hiring. Employers can create their own affidavit as long as it includes the same information as the IRS Form W-11 and it is signed under penalties of perjury. Although the affidavit isn’t required to be notarized, it should be.

Keep in mind there is a deadline for getting the signed affidavit from your employee; it must be done prior to filing the employment tax return and applying the payroll tax exemption. If the company has a remote workforce, the affidavit can be signed electronically. The electronic signature must be authenticated and verified.

In addition to the New Hire Tax Credit, employers can also take advantage of the newly enacted Returning Heroes Credit. Signed into law in November, the Returning Heroes Tax Credit is for employers hiring veterans who have been unemployed at least four weeks. There is a new credit of 40 percent of the first $6,000 of wages – up to $2,400. Hiring a veteran that has been unemployed longer than six months could result in a tax credit of 40 percent on the first $14,000 of wages – up to $5,600.

Separately, the Wounded Warrior Tax Credit doubles the existing tax credit for long-term unemployed veterans with service-connected disabilities. The new Wounded Warrior credit is 40 percent of the first $24,000 of wages (up to $9,600) for firms that hire veterans with service-connected disabilities who have been unemployed longer than six months.

The credits are intended to incent employers to hire the growing number of veterans, particularly those who have been unemployed for some time. According to White House data, approximately 240,000 veterans of the wars in Iraq and Afghanistan remain unemployed, while a total of 850,000 veterans overall are out of work. Under the Act, employers will be able to claim the credits for qualified veterans who begin work for the employer after Nov. 21, 2011, and before Jan 1, 2013.

When meeting with your tax team, it’s also a great idea to pull the human resource group into the discussion so the hiring strategy helps to maximize any existing credits available.

Thomas Jones, Jr., serves as partner of Tax and Small Business services within McConnell Jones Lanier & Murphy LLP, one of the largest accounting and consulting firms in Houston.