Many contractors regularly lay off construction workers during the winter, only to rehire – often the very same workers – when construction work picks up in the spring. Some of these new hires should qualify for a new tax credit, available only for 2010.

Since the credit is available for employees hired earlier in the year, employers should review all employees hired since early February to determine eligibility.

As part of its effort to encourage businesses to hire the unemployed, Congress passed the Hiring Incentives to Restore Employment (HIRE) Act earlier this year. Businesses that hire eligible employees receive a payroll tax credit to offset the employer’s share of the Social Security tax (6.2 percent) on wages paid between March 19, 2010, and Dec. 31, 2010.

Who qualifies for the new HIRE credit?

To qualify for the credit, the newly hired employee must meet four tests. The employees:

• Must be hired – or rehired – after Feb. 3, 2010, and before Jan. 1, 2011.

• Must have been unemployed for the 60 days prior to being hired. An employee meets this test if he or she worked 40 hours or fewer during that 60-day period.
• Cannot have been hired to replace a terminated employee unless the former employee voluntarily separated or was separated for cause, including downsizing.
• Must provide the employer with a statement certifying he or she was unemployed for the prior 60-day period.

The credit is available for employees only. It is not available for hiring independent contractors or self-employed persons. Certain relatives and business owners do not qualify for the credit.

There is no requirement that the qualified employee had received unemployment benefits. So students, recent graduates and first-time job seekers qualify for the credit. There is no minimum age requirement.

The IRS may closely examine situations that have the potential for abuse. In particular, it will want to verify that employment actually terminated and that the employee was not on temporary furlough.

For example, a company that claims a credit for an employee who is laid off and rehired 61 days later could expect an IRS review. However, if the layoff takes place because of the normal seasonal fluctuations in the business cycle – or if the layoff occurred before passage of the HIRE Act – the employer should be able to demonstrate that the layoff and rehiring were not steps in a tax-evasion plan.

After 52 weeks of employment, the HIRE Act provides an additional income tax credit equal to the lesser of $1,000 or 6.2 percent of the compensation paid to the employee during the 52-week period.

To qualify for the additional credit, the employee’s compensation during the second 26 weeks of the period must be at least 80 percent of that employee’s compensation during the first 26 weeks.

It is unlikely that many seasonal employees will qualify for the additional credit. Newly hired permanent employees are more likely to qualify.

How much money could be saved if hiring unemployed workers?

Creative Construction Company hires 10 construction workers during 2010. All of the workers provide the company with a certification that they meet the requirement of having been unemployed during the 60 days leading up to their hiring by CCC.

All workers were hired after Feb. 3, 2010. The workers earn an average of $1,000 per week for 30 weeks beginning in the spring of 2010 and ending in the fall of 2010.

CCC is entitled to a payroll tax credit of $18,600, calculated as follows:

Note that CCC is entitled to the credit, even if a worker does not remain employed with the company. The credit is calculated based on the amount of compensation actually paid to the worker during 2010.