Tax Credits For New Hires and Health Care Coverage

Recent legislation has provided two new tax credits for employers. The HIRE Act provides tax incentives to hire unemployed workers. The health care

HIRE Act Payroll Tax Credits

The Hiring Incentives to Restore Employment (HIRE) Act was enacted on March 18, 2010 with the intention of stimulating employment by offering incentives to employers.  The Act provides two tax benefits to employers who hire certain previously unemployed workers.  The first benefit is an exemption from the employer share of social security taxes on the employee's wages.  The second benefit is a tax credit of 6.2% of the employee's wages if they are retained for at least 52 consecutive weeks.

In order for an employee to qualify, they must have been unemployed for all but 40 hours during the previous 60 days.  The employer is required to obtain a signed affidavit from the employee stating that they have been unemployed.  The IRS has prepared form W-11 for this purpose.

The new hire is expected to be filling a newly created position.  If they are hired to fill an existing position, they can also qualify, but only if the worker they are replacing left voluntarily or for cause. 

The tax credit can be claimed on any wages paid between March 19, 2010 and December 31, 2010 for any qualified new employees who were hired after February 3, 2010.  The credit is claimed on line 6 of the employer's quarterly payroll tax return (form 941).

If the employee is retained for at least 52 weeks, then the employer qualifies for the second incentive.  This incentive is equal to 6.2% of the employee's salary, up to $1,000.  It is claimed on the business's 2011 income tax return as a general business credit

Small Business Health Care Tax Credit

Included in the health care bill that was passed earlier this year is a tax credit to small employers to help them pay for the cost of health insurance.  The maximum amount of the credit is 35% of the cost of health care coverage provided to employees (25% for non-profit organizations).  The amount of the credit increases to 50% (35% for non-profits) beginning in 2014.

To be eligible, the employer must meet certain requirements based on the number of employees and the average annual wages.  To qualify for the entire credit, the business must have 10 or fewer employees with an average annual salary of $25,000 or less.  The credit phases out gradually from 10 to 25 employees and $25,000 to $50,000 average annual salary.  Also, the business must cover at least 50% of the cost of the employee's health care coverage.

The cost of health care coverage for business owners and their families are not eligible for the credit and are not taken into consideration when computing the business's eligibility.

The tax credit is claimed on the business's income tax return each year.