Mr. Edwards

Revenue Management

What the HIRE Act Incentives Mean for Hospitality Employers

By Brandon Edwards, President, The Tax Credit Company

Most business executives don’t feel they are getting much out of the federal stimulus initiatives, but hospitality employers are well-positioned to get a disproportionate piece of one such program: the HIRE Act hiring-based tax incentive program. In fact, hotel operators may claim tax benefits of about $750 per qualified hire (and more than half of new hires are likely to qualify).

Listed among a handful of business incentives and unrelated offshore tax compliance regulations, the HIRE Act, which stands for “Hiring Incentives to Restore Employment”, is also referred to as the Hire Now Tax Cut. The legislation includes a combination payroll tax exemption and income tax credit program that rewards employers for hiring employees who have been unemployed for most of the previous 60 days.

This program was sponsored by Sens. Charles Schumer and Orrin Hatch and was subsequently signed by President Barack Obama on March 18, 2010. The program is unprecedented in that it provides benefits to companies whether they are profitable or not (including non-profits and public universities), provides immediate cash flow benefits through a payroll tax incentive and rewards both white-collar and blue-collar employers.

Here is how it works:

• Anyone hired from February 3, 2010, who worked less than 41 hours in the 60 days prior to starting work is qualified. Time spent as a student or self-employed individual (either working for their own business or as an independent contractor for another business) should not be included in the calculation of the hours. Also, the employee may qualify even if they were rehired by the same employer.
• The employee must sign the W-11 form attesting to their qualification. The form is then kept for the employer’s records since the IRS may request it later on.
• For all qualified employees, there are two benefits for the employer. First, the employer is exempt from paying the 6.2 percent social security tax match for FICA wages paid from March 19, 2010, through the rest of the year. Second, for every qualified employee who is retained for 52 weeks, the employer gets a federal income tax credit of up to $1,000. The retention credit is calculated as the lesser of either $1,000 or 6.2 percent of the total wages over the initial 52-week period, and is available only if the wages from the second 26 weeks of employment are at least 80 percent of those for the first 26 weeks.
• If the employer is taking the WOTC credit (which is another hiring tax incentive that all hotel operators should be screening for), they can claim only the $1,000 retention credit, not the payroll tax exemption.
• The employer may claim both HIRE Act incentives even if they are claiming a 45B credit for the same employee.
• The incentive applies to full-time and part-time employees, but the employer is not permitted to replace someone for the purpose of getting the tax incentive on someone else. Likewise, relatives of the business owner(s) who are hired by the business are not eligible, even if they fall below the 41 hour threshold.
• The employer will file the payroll tax exemption on their 941 payroll tax return starting with the second quarter form, and the retention credit on their 2011 federal income tax return.

Using best practices, roughly 50-70 percent of new hires will qualify. And the average value should fall in the range of $750 per qualified employee. Whether the employer hires 20 per year or 20,000, this is a can’t-miss opportunity to cut costs.

It’s not too late to capture the credit on qualified employees the employer already has generated this year. The HIRE Act program has no deadline other than the standard statute of limitations on amending payroll and income tax returns (three years), but the employer should not wait too long, as it will be difficult to obtain the required employee signature if he or she is no longer working for them.

One important point is that the incentive goes to the employer of record, which is generally speaking the entity whose Employer Identification Number shows on the payroll reports (although employers with a co-employment/PEO/employee leasing relationship are often exceptions and should consult an expert for clarification). This means that owners who reimburse a management company for actual payroll costs should make sure the management company is taking advantage of the program.

There are several important rules and restrictions, so the employer should make sure to review the fine print before claiming the benefits. Service providers also can help automate the process of screening, documentation and compliance.

For now, the HIRE Act program only includes incentives for hires made through the end of 2010, but legislation is working its way through Congress that may extend the program for at least another six months.

How to implement a screening program:

There are several stages involved in implementing a screening program for HIRE Act incentives:

1. Retroactively qualify and document employees hired on or after February 3, 2010, who are still employed. Determine whether they meet the qualification criteria and have them sign the W-11 form if they do.
2. Make sure that all new hires are being screened to determine qualification for the program by making it part of your application/new hire process through the end of 2010 (or later if the program is extended).
3. If you have already filed your quarterly 941 payroll tax return (currently, the 2nd, 3rd, and 4th quarter returns for 2010 are applicable), amend the return to reflect the exemption and claim your payroll tax refund.
4. You are permitted to decrease your payroll tax deposits in advance of the quarterly filing according to the amount of the exemption. If you outsource payroll, you can instruct your payroll provider to “turn off” the ongoing 6.2 percent tax payments on qualified employees through the end of the year. Most major payroll providers should be able to accommodate the request. Then file the total exemption amount on your quarterly return.
5. At the end of 2011, determine the number of employees who meet the retention credit criteria, and claim the income tax credit on the entity’s tax return (S-Corps, partnerships and LLC’s flow the credit through to the ultimate shareholders).

Hospitality employers should incorporate the above steps into the hiring process to ensure that all employees are being screened and documented for the HIRE Act tax exemption and credit. Among all of the cost-cutting initiatives meant to increase operating profits, tax credit screening initiatives provide one of the highest returns on investment, especially when the employer combines the HIRE Act with the other federal, state and local hiring-based tax incentives available. Executed properly, these tax incentives can contribute material benefit to the bottom line.

For more information on the program, visit the IRS website at http://www.irs.gov/businesses/small/article/0,,id=220745,00.html

To sign up for updates on HIRE Act program developments, visit our HIRE Act blog at http://www.hireactof2010.com/

Brandon Edwards is president of The Tax Credit Company (TCC), a leading independent national provider of tax incentive consulting, administration and technology. Mr. Edwards is an expert in high-value tax incentive programs including Enterprise Zones, National Hiring Incentives and Research & Development Tax Credits. He is passionate about maximizing tax incentive opportunities for clients and takes pride in delivering customer-focused solutions that unlock material value for clients. Mr. Edwards can be contacted at 818-286-0338 or bedwards@taxcc.com Extended Bio...

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