Monthly Archives: December 2010

Hiring Incentives to Restore Employment Act of 2010

The “Hiring Incentives to Restore Employment Act of 2010” (the 2010 HIRE Act), was signed into law this year. The centerpiece of which is a payroll tax holiday and up-to-$1,000 tax credit for businesses that hire unemployed workers. Here’s an overview of these new hiring incentives. We want to be sure that if you have not been taking advantage of this law that we file amended payroll tax returns and file 4th quarter payroll returns accordingly.

The new law exempts any private-sector employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hired an unemployed worker and paid that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. As an additional incentive, for any qualifying worker hired under this initiative that the employer keeps on payroll for a continuous 52 weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period.

Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after the date of the new law’s enactment receive the exemption for payroll taxes.

Here are some additional features of the new hiring incentive:

  • The tax benefit generally applies only to private-sector employment, including nonprofit organizations.
  • There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no maximum on the dollar amount of payroll taxes per employer that may be forgiven.
  • For workers that would otherwise be eligible for the “Work Opportunity Tax Credit,” the employer must select one benefit or the other for 2010—no double dipping.
  • An employer can’t claim the new tax breaks for hiring family members.
  • A worker who replaces another employee who performed the same job for the employer is not eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
  • For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
  • The incentive is not biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
  • The payroll tax holiday does not apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the first calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.
  • The credit for retaining qualifying new hires is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

I hope this information is helpful. If you would like more details about these provisions or any other aspect of the new law, please do not hesitate to contact us.

Health Care Tax Credit

With all the recent tax changes and upheaval we wanted to make sure you were aware of the tax credit available for certain  employers providing health insurance coverage for their employees.

The credit is specifically targeted to help certain small businesses that primarily employ moderate-income workers and lower-income workers. The credit can offset a taxable employer’s regular tax liability.

During the first phase of the credit (i.e., tax years beginning in 2010, 2011, 2012, or 2013), the amount of the credit is generally 35% of the employer’s non-elective contributions toward the employees’ health insurance premiums. In the second phase of the credit (i.e., tax years beginning after 2013), the amount of the credit is generally 50% of the employer’s non-elective contributions. The amount of the credit is subject to a phase-out (described below).

An employer qualifying for the credit (i.e., an eligible small employer or ESE) has to meet all of the following requirements:

  1. The employer can’t have more than 25 full-time equivalent (FTE) employees for the tax year. An employer’s FTE employees are determined by dividing the total hours worked by all employees during the year by 2,080 (rounded down to the nearest whole number).
  2. The average annual wages of the employees can’t exceed $50,000 (for tax years beginning after 2013, the dollar amount is indexed for inflation) for the tax year. The average annual wages are determined by dividing the total wages the employer pays by the number of its FTE employees and then rounding that number down to the nearest $1,000.
  3. The employer has to contribute at least 50% of the premiums for the employees’ health insurance coverage on a uniform basis. However, for tax years beginning in 2010 only, an employer can meet this requirement even if it pays differing percentages of different employees’ premiums as long as all employer payments are at least 50% of each employee’s premium based on single (employee only) coverage.

The amount of the credit gradually phases out if the number of a company’s FTE employees exceeds ten or if the average annual wages of the employees exceed $25,000. Under the phase-out, the full amount of the credit is available only to an employer with ten or fewer FTE employees and whose employees have average annual wages of less than $25,000. However, an employer with exactly 25 FTE employees or average annual wages exactly equal to $50,000 is not in fact eligible for the credit. Since the eligibility rules are based in part on the number of FTE employees, not the number of employees, in certain circumstances, a business that uses part-time help can qualify for the credit even if it employs more than 25 individuals.

For purposes of determining whether an employer is an ESE and determining the amount of the credit, self-employed individuals, including partners and sole proprietors, 2% shareholders of an S corporation, and 5% owners of the employer and certain relatives of these individuals are not treated as employees for purposes of the small employer health insurance credit. There are also special rules that apply to seasonal workers, leased employees, and employees who have more than 2,080 hours of service during a tax year.

An employer is entitled to an ordinary and necessary business expense deduction equal to the amount of the employer contribution minus the dollar amount of the credit. For example, if an ESE pays 100% of the cost of its employees’ health insurance coverage and the amount of the tax credit is 50% of that cost (i.e., in tax years beginning after 2013), the employer can claim a deduction for the remaining 50% of the premium cost. Any unused credit can be carried back for one year (but not before 2010) and forward for 20 years to offset future taxes.

Please let us know if you have any questions concerning the credit or if we can assist you in determining whether your business can benefit from claiming the credit.

Roth IRA Rollovers

We are writing to tell you about a current tax opportunity. In 2010, for the first time, you may roll over amounts in qualified employer-sponsored retirement plan accounts, such as 401(k)s and profit sharing plans, and regular IRAs, into Roth IRAs—regardless of your adjusted gross income (AGI).

In case you are not familiar with Roth IRAs here is a summary of why they can be attractive:

  • Earnings within the account are tax-sheltered (as they are with a regular qualified employer plan or IRA).
  • Unlike a regular qualified employer plan or IRA, withdrawals from a Roth IRA aren’t taxed if some relatively liberal conditions are satisfied.
  • A Roth IRA owner does not have to commence lifetime required minimum distributions (RMDs) after he or she reaches age 70 1/2 as is generally the case with regular qualified employer plans or IRAs.
  • Beneficiaries of Roth IRAs also enjoy tax-sheltered earnings (as with a regular qualified employer plan or IRA) and tax-free withdrawals (unlike with a regular qualified employer plan or IRA). They do, however, have to commence regular withdrawals from a Roth IRA after the account owner dies.

The catch, however is, that the rollover will be taxed at your current tax rate. For example, if you are in the 28% federal tax bracket and roll over $100,000 from a regular IRA funded entirely with deductible dollars to a Roth IRA, you’ll owe $28,000 of tax. So you’ll be paying tax now for the right to future tax-free withdrawals, and freedom from the RMD rules mentioned above.

Should you consider making the rollover to a Roth IRA? The answer may be “yes” if:

  • You can pay the tax on the rollover with non-retirement-plan funds. Keep in mind that if you use retirement plan funds to pay the tax on the rollover, you’ll have less money building up tax-free within the account.
  • You anticipate paying taxes at a higher tax rate in the future than you are paying now. Many observers believe that tax rates for upper middle income and high income individuals will trend higher in future years.
  • You have a number of years to go before you might have to tap into the Roth IRA. This will give you a chance to recoup (via tax-deferred earnings and tax-deferred payouts) the tax hit you absorb on the rollover.
  • You are willing to pay a tax price now for the opportunity to pass on a source of tax-free income to your beneficiaries.

Roth rollovers made in 2010 represent a novel tax deferral opportunity and a novel choice. If you make a rollover to a Roth IRA in 2010, the tax that you’ll owe as a result of the rollover will be payable half in 2011 and half in 2012, unless you elect to pay the entire tax bill in 2010.

Keep in mind that absent Congressional action, after 2010, the tax brackets above the 15% bracket will revert to their higher pre-2001 levels. That means the top four brackets will be 39.6%, 36%, 31%, and 28%, instead of the current top four brackets of 35%, 33%, 28%, and 25%.  However, the Obama administration and Congress appear likely to extend the tax cuts for at least 2011 and 2012, even for higher bracket taxpayers.  In that case, paying the tax in 2011 and 2012 might make sense.

Individuals ineligible to make deductible contributions to a traditional IRA, or to make any regular contributions to a Roth IRA, due to limitations based on adjusted gross income, may contribute to a traditional IRA and then convert this amount to a Roth IRA. So individuals who have never opened a traditional IRA because they weren’t able to make deductible contributions (and who have never rolled over pre-tax dollars to a regular IRA) should consider opening such an IRA and making the biggest allowable nondeductible contribution they can afford. If they convert the traditional IRA to a Roth IRA they will have to include in gross income only that part of the amount converted that is attributable to income earned after the IRA was opened, presumably a small amount. They could continue to make nondeductible contributions to a traditional IRA in later years, and roll the contributed amount over into a Roth IRA. However, note that if an individual previously made deductible IRA contributions, or rolled over qualified plan funds to an IRA, complex rules determine the taxable amount.

What if you convert your IRA to a Roth IRA in 2010 and the value of the Roth IRA’s investment drop?  The Roth rules allow you to “undo” the Roth conversion (called a “recharacterization”) until the due date of your 2010 tax return.  With extensions, that deadline is October 15, 2011.

We should discuss your and your family’s entire financial situation before you plan for a large rollover to a Roth IRA. There also are many details that we should go over, such as whether the amounts you are thinking of switching to a Roth IRA are eligible for the rollover (technically, they are called “eligible rollover distributions”), whether you can make rollovers from your employer sponsored plan (for example, there are restrictions on rollovers from 401(k) plans), and the tax impact of rolling over amounts that represent nondeductible as well as deductible contributions.

We look forward to your call.