May 5, 2010
Dear Clients:
With tax season 2010 now behind us, it’s time to start planning for the 2010 tax year. Several of our clients have asked questions about the recent tax legislation that has passed with regard to new hires and health insurance, so we thought we’d 
outline those two new passages for you. Please review the bullet points and let us know if you have questions about anything presented, especially the HIRE Act outline. If you do have new employees who fit these criteria, it’s important to let us know so you can get credit for them per the new law.
HIRE Act
The Hiring Incentives to Restore Employment (HIRE) Act was passed on March 18, 2010, to encourage employers to hire previously unemployed individuals or individuals who are only working part time. Here are the bullet points:
- Employers who hire unemployed workers this year (after Feb 3 and before Jan 1, 2011) may qualify for a 6.2% payroll tax incentive, which exempts them from their share of Social Security (SS) taxes on wages paid after March 18, 2010;
- The reduced tax withholding will have no effect on the employee’s future SS benefits;
- Employers still need to withhold the employee’s 6.2% share of SS taxes, as well as all other applicable withholdings;
- Medicare taxes ARE NOT exempt, only SS taxes;
- Family members and relatives DO NOT qualify;
- The employer MUST get a statement from the eligible new hire certifying that he or she was unemployed during the 60 days before beginning work, or worked fewer than 40 hours for someone else during the 60 day period (see the enclosed Form W-11 that needs to be completed by each eligible new hire);
- Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim the payroll tax benefit;
- Household employers DO NOT qualify;
- Employers will claim the payroll tax benefit on the federal employment tax return they file each quarter with IRS. The second quarter forms will be revised to include information pertaining to the tax incentive. Basically, you don’t change anything you’re doing with regard to withholding or tax deposits at this time, since the credit is claimed on your Forms 941 or 944;
- In addition, for each worker retained for at least a year, businesses may claim an additional general business credit of up to $1,000 per worker when they file their 2011 tax returns.
It will be my advice to you that since most of you are utilizing some sort of software, such as QuickBooks Pro, that you continue calculating and making your payroll tax deposits as you always have in the past. We will claim the credit for all affected employees on the 941 for second quarter and the quarters following. This will ensure that you don’t underpay your payroll taxes.
Small Business Health Care Tax Credit
Several of you may have received a postcard from IRS containing brief news about the new health care incentives. As the economy began to experience its recession over the past 18 months or so, several of you began to cut back on benefits and some of you discontinued them entirely. If you decide after reading this information that you want to examine the potential benefit of reinstating those benefits or some alternative plan, please let me know and we can examine the tax impact of doing so.
Eligibility Rules:
- A qualifying employer must cover at least 50% of the cost of health care coverage for some of its workers based on the single rate;
- A qualifying employer must have less than the equivalent of 25 full-time workers (which means that an employer with fewer than 50 half-time workers may be eligible);
- A qualifying employer must pay average annual wages below $50,000 (total wages paid for the period divided by the number of full-time workers);
- Both for-profit and not-for-profit employers qualify.
Amount of Credit:
- At its maximum, the credit is worth up to 35% of a small business’ premium costs in 2010. On Jan 1, 2014, this rate increases to 50% (35% for tax-exempt employers);
- The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.
We were given several examples and eligibility sheets by IRS so we can run the test for any of you that are considering reinstating benefits, or for those of you who currently offer your employees health insurance coverage and could qualify for the credit. We encourage you to make an appointment to come in so we can analyze your payroll and see if this credit will benefit you this year and in future years.
As with all new tax legislation, we will keep you posted on any new developments as they become available to us. We usually post updates to our website, so feel free to check there as you wish.
We certainly appreciate your loyalty as clients, and look forward to hearing from you soon! We wish you a successful and prosperous 2010!
Best regards,
Jonathan I. Godwin, CPA