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Narrow Window Still Cracked Small Business Incentives

Just two short years ago, the country was poised for a near state of emergency as the economy teetered on the brink of its first depression since the Great Depression of the 1930s. The economic downturn delivered an especially hard hit to some industries, and as is customary during a recession, many small businesses were quick to retrench, choosing to “shelter-in-place” by cutting costs and halting hiring.

Now leading economic indicators are beginning to show promising signs of growth again, and while we may not be entirely through the storm, the outlook appears brighter than it has in some time. As bullish economists and pessimistic pundits debate whether these glimmers we see through the clouds are the dawn of a new day or merely the eye of the storm, the White House remains focused on reigniting the economy by launching initiatives designed to accelerate the pace of job growth.

Because the majority of new jobs each year are created by small business, the federal initiatives are understandably geared toward small business owners. Consequently, this could be an especially opportune time for smaller employers to emerge from their safe havens and reengage in the hiring process. But with so much new legislation coming out of Washington these days, it is reasonable that business owners might be confused and potentially miss a narrow window of opportunity. To help small business owners better understand and be prepared to take advantage of these initiatives, below is a brief overview of two programs, passed and proposed, that might encourage some employers to start staffing up.

Hiring Incentives to Restore Employment Act (HIRE)

As part of the Federal Jobs Bill, President Obama recently signed into law the Hiring Incentives to Restore Employment (HIRE) Act. The new legislation, which became effective as soon as it was enacted on March 18, 2010, is intended to have an immediate impact on the labor market by offering employers tax incentives for hiring previously unemployed workers.

These incentives include an exemption from the 6.2 percent Social Security tax (employer’s share only) for qualified new hires, as well as an additional retention credit if those new hires stay employed with the company for 52 consecutive weeks and work a minimum of 37.5 hours per week. The maximum exemption an employer may take is $6,621.60 per new hire (6.2% times the Social Security wage cap of $106,800). The retention credit is equivalent to the lesser of $1,000 or 6.2 percent of the eligible employee’s gross wages from March 19, 2010 through December 31, 2010.

Because the goal is to get unemployed workers back to work, for a company to be eligible for the exemption, the new hire must not have worked more than 40 hours in the 60 days prior to their start date. Also, employers cannot take the Social Security exemption for any employee hired to replace an involuntarily terminated employee unless the termination was “for cause.” So employers cannot layoff an employee only to replace him or her with a new hire.

In order for an employer to claim the HIRE Act tax incentive, the newly-hired employee must sign an affidavit verifying that he or she was indeed unemployed for the 60 days prior to being hired. The HIRE Act is currently scheduled to expire on December 31, 2010.

Small Business Jobs and Wages Tax Cut

To get even more unemployed Americans working again, the White House has also proposed the Small Business Jobs and Wages Tax Cut (the “Tax Cut”). It would allow businesses to receive a $5,000 tax credit for every net new employee they hire in 2010. For example, a small business that hires ten new employees in 2010 would be eligible to receive a $50,000 tax credit to help offset the costs of those new hires. The total amount of credit would be capped at $500,000 per firm to ensure that the majority of the benefit goes to small businesses.

In addition, small businesses would be reimbursed for the Social Security payroll taxes they pay on real increases in their payrolls. Specifically, firms that increase wages, expand hours, or hire new workers would get a credit against the added payroll taxes that result. For example, a small business with 50 employees that, through increased hours or higher pay, provides all of its employees a $1,000 real wage increase in 2010 would receive a $3,100 tax credit, enough to cover the Social Security payroll taxes on those increases.

There would be several important stipulations to prevent businesses from “gaming” the system. For starters, a small business that fires ten workers and then hires ten new workers to replace them would see no net increase in employment and thus would not receive a credit. Similarly, a business that terminates ten employees making $50,000 each and hires 20 employees making $25,000 each will receive no credit. Finally, payroll reimbursements are based on Social Security payrolls, so it does not apply to wage increases above the current taxable maximum of $106,800. That means that a small investment firm that raises salaries for its top employees from $300,000 to $350,000 would not receive a credit.

For a small business with little human resource support, merely filing to claim these federal incentives could become a significant administrative burden, so although these incentives may appear enticing on their surface, they are hardly so lucrative that employers should feel pressure to make a move before they are entirely ready. However, for small business owners who genuinely intend to grow their companies, federal tax cuts and credits can provide an immediate and worthwhile incentive to take the plunge and post for a position sooner rather than later.

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