Tax Benefits for Employers
Under the federal Hiring Incentives to Restore Employment (HIRE) Act, two new federal tax benefits are available to employers who hired certain previously unemployed workers.
The first, referred to as the payroll tax exemption, provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010.
An employer may not claim both the payroll tax exemption and the Work Opportunity Tax Credit (WOTC) for the same employee.
The second is the new hire retention credit. This law provides that for each qualified employee retained for at least 52 consecutive weeks, businesses are eligible for a general business tax credit of 6.2 percent of wages paid over the 52 week period, up to a maximum credit of $1,000.
The employer is not required to reduce salary expenses by the amount of the new hire retention credit. No carryback is allowed, but this credit may be carried forward for 20 years. The WOTC and the new hire retention credit can both be claimed for the same employee.
Since there is no reduction to employer’s federal wage deduction, no adjustments are necessary for California tax purposes. In addition, these new federal tax benefits do not affect the state’s new jobs credit, form FTB 3527 or the enterprise zone credits, form FTB 3805Z.
California does not conform to either of these new federal tax benefits; however, we do have several hiring credits.
New Jobs Credit
A credit of up to $3,000 is available for each additional full-time employee hired by small businesses with 20 or fewer employees.
State funding for this credit is limited to $400 million. It is being issued on a first-come, first-served basis. To date, only about 10 percent of this credit has been issued.
Enterprise Zone Credits
Both individuals and business entities that conduct business activities within the boundaries of any of California’s designated enterprise zones (EZ) may qualify for special tax incentives. Three new EZs were designated this year in Anaheim, Harbor Gateway, and Santa Clarita. These designations are effective starting in 2011.
Key EZ State Tax Incentives:
- Hiring credit is allowed to qualified employers who hire qualified employees and pay them qualified wages.
- Sales or use tax credit is equal to the sales or use tax paid or incurred in connection with the purchase of qualified property. There is a $20 million purchase limitation for corporations and $1 million for individuals and partnerships.
- Business expense deduction of up to 40 percent of eligible cost of qualified property in the year it is placed in service may be taken instead of capitalizing the expense.
- Net interest deduction allows lenders to deduct from their taxable income the amount of "net interest" they earn from loans made to a trade or business solely located in an EZ.
For more information, go to ftb.ca.gov and search for enterprise zones.