News Alert from DDK & Company LLP

Payroll Tax Exemption and Income Tax Credit for Hiring New Workers

The HIRE Act provides two new tax benefits to employers hiring workers who were previously unemployed or only working part time. The first is a 6.2-percent payroll tax incentive, in effect exempting employers from their share of Social Security taxes on wages paid to these workers. The exemption applies to workers hired from February 4 to December 31, 2010, but only to wages paid to these workers from March 19 to December 31, 2010. There are no maximum or minimum number of hours that must be worked. The benefit is claimed on the employer's quarterly federal employment tax return, starting with the second quarter of 2010 (taxes paid for services performed from March 19 to March 31 will be refunded with the second-quarter return).

Employers still must withhold and remit the employee's 6.2-percent share of Social Security taxes. The 1.45-percent share of Medicare taxes due from both the employer and employee will also still apply. The Treasury will make up the lost funds to the Social Security trust fund, and the reduced payroll tax will have no effect on the employee's future Social Security benefits.

The other benefit is a credit, up to $1,000 per employee, received for any worker qualifying for the above payroll tax exemption who remains on the payroll for 52 consecutive weeks. The credit is 6.2 percent of the wages paid to the employee during the 52 weeks, capped at $1,000 for each worker (the maximum credit is reached once the employee earns $16,129). Businesses can claim this as an additional general business tax credit when they file their 2011 income tax returns. Unused credits may only be carried forward.

Based on the $106,800 FICA wage cap in 2010, the payroll tax exemption is worth up to $6,622 for each employee. Including the retained worker business credit, a benefit of up to $7,622 may be obtained for each qualifying new hire.

To be eligible for these benefits, the employer must obtain a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked elsewhere for less than 40 total hours during the 60-day period. The IRS will release a form employees can use to make this statement. The benefits apply not only to newly created positions, but also to workers filling existing vacant positions if the replaced worker left voluntarily or for cause. Household employees, and employees that are either related to the employer or directly or indirectly own more than 50 percent of the business, are ineligible.

Internal Revenue Code section 179 allows businesses to write off the cost of new qualifying property, including equipment, fixtures, and off-the-shelf software, in full the year it is placed in service rather than depreciating or amortizing this cost over a number of years. Before the HIRE Act, the most that could have been expensed under this provision, would have been reduced to $125,000. The new law extends the $250,000 maximum that was in effect in 2009 for another year. The annual threshold for new assets placed in service (above which the section 179 expensing limit is phased out) also remains at its 2009 level of $800,000.

The new limits apply to assets placed in service in the business's tax year that begins in 2010, not to calendar year 2010. Thus fiscal-year businesses may use the new limits to expense assets placed in service in 2011, until the end of their fiscal year.

To help pay for these new tax benefits, the HIRE Act imposes new reporting requirements on foreign financial institutions with U.S. account holders. This is a compliment and backup to the existing Foreign Bank Account Reporting (FBAR) requirements on the account holders themselves, and will provide the IRS with foreign account information when taxpayers fail to comply with the FBAR rules.

The new requirements apply to overseas entities in the business of investing and trading in securities, partnership interests, commodities, or related derivative interests - including banks, hedge funds, private equity funds, mutual funds, and securitization vehicles. These firms are required to identify their U.S. customers and report to the IRS both payments to them and activity in their accounts. Although outside the direct reach of U.S. law, these firms must now pay a 30-percent withholding tax on payments from the U.S. if they do not satisfy the reporting obligations. Many of these companies have substantial U.S. investments, or hold substantial U.S. financial assets for their customers, and will likely comply with the disclosure and reporting requirements rather than pay the withholding tax.

Payments from U.S. payors to other (non-financial) foreign entities are also subject to the 30-percent withholding if the payee does not provide the U.S. payor with either a certification that the entity does not have a substantial U.S. owner, or the name, address, and taxpayer identification number of every substantial U.S. owner. A substantial owner is generally one who owns more than ten percent of a corporation's stock or is entitled to more than ten percent of a partnership's profits. For overseas investment firms, however, any U.S. owner must be reported regardless of the size of its interest.

Implementing these rules will present many operational challenges and expenses for foreign financial institutions. To allow them time to prepare their systems, the new reporting and withholding requirements will go into effect for payments made beginning in 2013.

If you have any questions, please do not hesitate to contact us.

Thank you,

DDK & Company LLP