Hire an Unemployed Worker and Save Taxes

In the state with the highest unemployment rate in the nation, it is often just a matter of time before a Michigan business hires an unemployed worker. Recently Congress and President Obama created a new law that allows companies that hire unemployed workers to pay less taxes relative to companies that hire "employed" workers.

In March, the Hiring Incentives to Restore Employment (HIRE) Act was signed into law providing some temporary tax breaks for companies who hire and retain people who have been unemployed. A couple important parts of the HIRE Act are as follows:

• Employers will be exempt from paying the employer portion of the Social Security tax (6.2%) on the wages of employees hired after February 3, 2010. The exemption applies to wages paid after March 18, 2010 and before January 1, 2011. The new hire can be for a newly created job or to fulfill an existing position if the former employee left voluntarily or was fired for cause. In order to qualify, the new employee must not have been employed for the previous 60 days, or has worked less than 40 hours during the previous 60 days. The eligible new hires are required to certify in writing that he or she meets these requirements. This certification is done on Form W-11, which can be found here.

• The employee's 6.2% of Social Security tax must still be collected and sent to the IRS. The employee and employer portions of Medicare tax, 1.45% each, also still need to be collected and remitted.

• Household employers are not eligible to claim the credit. Most family members also do not qualify for the credit, but spouses do qualify. This appears to be an unintended consequence of the law as it was written, but one possibly worth taking advantage of if you can legitimately employ your spouse in your business.
  

• An employer may also claim a tax credit of up to $1,000 per new employee (for those employees qualifying for the Social Security tax exemption described above) if the new employee stays with the employer for at least 52 weeks. The credit is the lesser of $1,000 or 6.2% of the wages paid to the retained employee during the 52-week period. Wages paid during the second 26-week period must equal at least 80% of the wages paid during the first 26-week period. In other words, a company can't keep someone on payroll for minimum wage for an hour or two a week just to meet the 52-week criteria in order to claim the credit. Employers may claim this credit when they file their 2011 income tax return.

Also included in the HIRE Act was an increase in the amount of Section 179 expensing for eligible equipment purchases. The amount was scheduled to be $134,000 for 2010, but this change brings the level back up to $250,000 where it has been the past couple years.