Have you read the National Taxpayer Advocate Report to Congress that was released in July? In it, National Taxpayer Advocate Nina E. Olson describes hiring hardships faced by the average small-business owner:
Consider an individual without a college degree who becomes a successful plumber or electrician with a growing customer base. If he hires employees, he will face a host of employment, immigration verification, and state and federal tax requirements, including the need to withhold and pay over payroll taxes . . . and to file employment tax and income tax returns on behalf of his business. For most taxpayers, these requirements would seem daunting or even impenetrable, and some taxpayers inevitably do not comply simply because they have no idea where to begin.
Let’s face it-when you are a small-business owner faced with the burden of endless paperwork, you’re apt to overlook the tax benefits available to you when you hire new employees.
New Tax Credit: Hiring the Unemployed
The Hiring Incentives to Restore Employment (HIRE) Act, enacted in March 2010, gives employers two benefits:
1. Immediate benefit: You don’t have to pay your share of Social Security on the wages of new employees hired since March 18, 2010. Save 6.2 percent on all wages paid through the end of this year. Claim this payment reduction on your quarterly payroll tax returns and payroll tax deposits right now. The 2010 Form 941 has been revised to take this benefit into account.
2. Future benefit: Once your employee has worked for you for a full year (okay, a year and a day), you are entitled to a tax credit of $1,000 per employee.
Which new employees will give you these benefits under HIRE? They must have been unemployed, or underemployed, for at least the last sixty days before you hired them. Underemployed means they have not worked more than forty hours in the last sixty days.
The IRS has developed a new Form W-11 for new hires to fill out to swear that they qualify. Don’t worry-as an employer, you won’t be responsible for investigating or proving their claim.
There is a whole set of rules about rehiring laid-off workers-and other situations folks have found themselves in. The IRS answers questions about these on its FAQs about Qualified Employees page.
Hiring Special Employees
Often overlooked is the Work Opportunity Credit. It’s been around for years. Hire unemployed veterans, young people, poor people, old people, convicts, and other hard-to-place workers. Your credit will range from 25 percent to 50 percent of first- and second-year wages. The wage limits depend on the category of worker. Summer youth wages are limited to $3,000. Discharged military wages are limited to $12,000, and everything else is limited to $6,000. The employees need to be certified by your state’s unemployment department or certain government agencies. Read the instructions for Form 5884.
Hiring the right employee is very important. Credits are great, but remember that whoever works for you must fit your business needs and the social environment of your workplace. You, your other employees, and your customers will be “living” with this individual, so make the choice that’s right for everyone involved.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.