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New Hire Retention Credit

January 06, 2012

Dina M. Ouellette, CPA
Director
BlumShapiro

The Hiring Incentives to Restore Employment Act of 2010 (HIRE Act) contained several provisions to give employers incentive to hire employees.  One of the provisions authorized a credit of up to $1,000 for “retained workers”.  This credit is called the New Hire Retention Credit.

A qualified worker must have started employment after February 3, 2010 and before
January 1, 2011.  The worker must be employed by the taxpayer for a period of not less than 52 consecutive weeks. 

The new hire retention credit 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, if a retained worker's wages during the 52 consecutive week period exceed $16,129.03, the retained worker credit will be $1,000.

For purposes of the credit, the definition of a qualified individual is the same as underIRC Sec. 3111(d)(3), which defines individuals hired before 2011 who qualified an employer for forgiveness of the employer's portion of social security taxes (the “payroll tax exemption”).  The individual was required, for example, to certify that he or she had not been employed for a certain period before beginning employment.  This was completed on Form W-11 or similar statement.

The qualified employee's wages for employment during the last 26 weeks of the 52 consecutive-week period must be at least 80% of the wages for the first 26 weeks of that period.  Wages include bonuses and taxable fringe benefits.  The business deduction for compensation will not be reduced or affected by this credit.

The credit can only be claimed for the tax year during which the 52-week requirement is first met for the worker.  This means that it is a one-time credit for each eligible worker, based on wages paid to that worker during the 52-week period that starts with his or her employment date.  As a result, calendar-year taxpayers are first eligible to claim the credit on their 2011 tax return.

Pass-through entities such as S Corps and partnerships will calculate the credit and pass it through to the shareholders and partners.  C Corporations and sole proprietors will calculate the credit and claim it on their tax return.

Example:  Reporting the New Hire Retention Credit

Mick Martin is the sole shareholder in MM, Inc., a calendar-year S Corporation.  
On February 5, 2010, MM hires a qualified worker, Jim Johnson, who is still employed at the end of the following year.  He was employed for at least 52 consecutive weeks, so MM is entitled to the new hire retention credit in 2011.  Jim is paid $315 for each week within the 52-week period, a total of $16,380.

The credit rate is 6.2% of the employee's wages, limited to $1,000 per new employee.  Because 6.2% of Jim's wages is $1,016, MM qualifies for the maximum credit $1,000. The S Corporation attaches Form 5884-B (New Hire Retention Credit) to Form 1120S.  It is reported to Mick on his Schedule K-1 as “other credits”.

Information that will be required to properly complete the New Hire Retention Credit form is as follows:

  • Retained worker’s social security number
  • Date employment started per worker’s W-11 or similar statement
  • Worker’s wages for the first 26 weeks and wages for the second 26 weeks  

Fiscal-Year Taxpayers

A fiscal-year taxpayer can claim the credit on its 2010 income tax return if the requirements for the credit have been met by the end of its 2010 tax year.  For fiscal-year filers, the earliest date to file a return claiming the credit would be fiscal years ending after February 3, 2011.  Certain fiscal-year taxpayers may have to claim the retention credit on tax returns for two tax years on an employee-by-employee basis.    

 

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