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Julie Sturgeon: New law helps in hiring new employees

Posted: May 5, 2010 4:26 p.m.
Updated: May 6, 2010 4:55 a.m.
 
A new law was enacted March 18, in order to help businesses reduce their payroll taxes, particularly with seasonal businesses that may be gearing up to hire new employees for the summer months.

New employees or rehired, previously laid-off workers may qualify employers for a payroll exemption, as well as a business credit under the Hiring Incentives to Restore Employment (HIRE) Act.

There are two provisions and here are details.

The first is a payroll tax holiday.It is a FICA tax forgiveness. When you hire certain unemployed workers, you may qualify for forgiveness of the 6.2 percent Social Security tax you would normally pay on the wages of those new employees.

Your new hires must start work after Feb. 3, 2010, and before Jan. 1, 2011. In addition, they'll have to certify by providing a signed affidavit, under penalties of perjury, they worked fewer than 40 hours during the 60-day period prior to starting the job with you.

Relatives are ineligible, and your new workers generally cannot displace a current employee, nor can they have been separated voluntarily nor for cause. The previous employer must be a "qualified" employer, meaning the government is not "qualified."

The exemption is available for wages paid from March 19, 2010 through Dec. 31, 2010. You will claim it on your quarterly payroll reports, beginning with the second quarter of 2010.

Note that you will still have to withhold and deposit the employee's portion of the Social Security tax, and both you and your employee are required to pay Medicare tax on all wages.

Be aware, too, that while the exemption will free up cash flow, you will have less payroll tax expense, and therefore a smaller deduction on your business tax return at the year's end.

Also, wages that are eligible for the exemption do not qualify for purposes of calculating the Work Opportunity Tax Credit, unless you opt to forego the exemption.

The second provision is in conjunction with the exemption for Social Security tax. You can take a federal tax credit for the newly hired workers who stay with your company for 52 consecutive weeks, if the wages during the last 26 weeks are not less than 80 percent of wages during the first 26 weeks.

The maximum credit is $1,000 per retained employee, and that credit will be claimed on your year-end business income tax return.

The HIRE Act also extended the enhanced Section 179 expensing rules. Through the end of 2010, you can expense up to $250,000 of machinery and equipment you purchase and use in your business, as long as the total cost of the assets you buy does not exceed $800,000. Bonus depreciation, which expired at the end of 2009, was not extended.

Julie M. Sturgeon is a certified public accountant in Valencia specializing in individual and business tax issues. Her column represents her own views and not necessarily those of The Signal. "It's Your Money" appears Thursdays and rotates between a handful of the valley's financial professionals.

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