To Hire or not?

To HIRE or not?
by Robert Wagner, CPA

On March 18, 2010 the Hiring Incentives to Restore Employment (HIRE) Act became law. The act has some really juicy tax benefits for employers that hire folks who have been unemployed for a while.

Payroll Tax Exemption

For an employer that hires a “qualified” employee the employer gets an exemption from paying social security tax on the new employee’s wages. The social security tax is calculated at 6.2% of wages paid. So for each $1,000 in wages paid to a qualified employee, the employer saves $62.

In order to take advantage of this tax break, make sure your payroll company knows you have hired a qualified employee. To do that, your new employee should complete new IRS Form W-11; available at the IRS Web site – http://www.irs.gov/pub/irs-pdf/fw11.pdf. Send the completed Form W-11 to your payroll company and then double-check your payroll reports to be sure that you are getting the HIRE tax exemption.

New Hire Tax Credit

In addition, the employer can claim a generous income tax credit on their 2011 income tax returns for each HIRE employee retained more than a year. The credit can be as much as $1,000 per retained HIRE employee.

Special Considerations for Restaurants

Restaurant operators should certainly consider taking advantage of the HIRE act for all new kitchen and front-of-the-house employees. It gets a little tricky when taking the HIRE tax exemption for new servers. Normally payroll taxes on server wages qualify for the FICA tip credit. Taking the HIRE tax exemption will mean that the FICA tip credit at the end of 2010 will be lower than normal. So while the HIRE tax exemption is a good thing even for servers, the restaurant operator may end up owing income taxes for 2010 because his FICA tip credit is lower than was expected. There is a similar issue with employees that qualify for the Work Opportunity Tax Credit (WOTC).

In addition, the HIRE tax credit available in 2011 may be limited on the restaurateur’s income tax return. That’s because the credit is subject to the Alternative Minimum Tax. If the operator cannot use the HIRE tax credit, at least the credit can be carried forward to another tax year.

Qualified Employee

The HIRE act tax reduction benefit is available only for a qualified employee – that is, an employee that began employment after February 3, 2010 and before January 1, 2011, who has been unemployed (or underemployed) during the 60-day period ending on the date he/she is employed. The qualified employee must certify that they have not been employed for more than 40 hours during the 60-day period ending on the date they start employment. Employees use Form W-11 to certify their unemployed status. Supply the Form 11-W to your payroll company. It does not need to be sent to the IRS. Note that the HIRE benefit is NOT available for an employee that is hired to replace an existing employee UNLESS the existing worker terminated voluntarily or for cause. Family members of the employer do not qualify for HIRE.

Bottom Line

The HIRE is a terrific tax benefit for restaurant operators. There is very little downside to taking HIRE to reduce payroll taxes for kitchen and management staff. In this economy, operators can use all the help they can get.

For restaurants with servers, care should be exercised in taking HIRE for servers since the reduction in payroll taxes will certainly reduce the amount of FICA tip credits available for 2010 and 2011.

For FAQs see http://www.irs.gov/businesses/small/article/0,,id=220745,00.html