written by Melinda Thurman

Melinda Thurman head shot

This is article number five in our series of Tax Credits. The previous articles can be found here.

As the year 2011 is coming to an end, taxpayers search for available credits to reduce their upcoming taxable income. A credit that may be overlooked is the New Hire Retention Tax Credit. You may have already taken a payroll tax credit in 2010 when some of these eligible employees were initially hired, but there’s more to it.

This additional credit was part of the Hiring Incentives to Restore Employment Act of 2010 (HIRE). The credit is a general business credit to encourage the retention of new hires. The employer may claim a credit of up to $1,000 for each retained worker who is a qualified employee. There is no limit on the number of qualified retained employees. The criteria for a qualified retained employee:

  • Must begin work after February 3, 2010 and before January 1, 2011
  • Must complete and sign form W-11 declaring that he was employed for a total of 40 hours or less during the 60 day period ending on the date the employment begins
  • Is not to be employed to replace another employee, unless the former employee left voluntarily
  • Is not related to the employer
  • Must have been employed for at least 52 consecutive weeks
  • Must have wages during the second 26 weeks of the 52 consecutive week period of at least 80% of the wages for the first 26 weeks of the 52 consecutive week period

 The credit is available in the first taxable year the 52 consecutive week requirement is met. For calendar taxpayers, the first eligible year for this credit is tax year 2011. An employer may claim both the payroll tax exemption on wages paid in 2010 (reported on the quarterly federal employment return) and the new hire retention credit on the income tax return for the same employee as long as all requirements are met.

In addition, the credit is available even if the Work Opportunity Tax Credit has been claimed. The credit is calculated on Form 5884-B and the employer claims the credit on Form 3800 to be attached to the employer’s income tax return. The credit is the lesser of $1,000 or 6.2 percent of the employee’s wages paid for the 52 consecutive week period. This credit cannot offset alternative minimum tax but any unused credit may be carried forward 20 years.

If you think you may benefit from this credit, please contact us today.