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Taking the Employee Retention Credit on Your 2011 Business Tax Return

Companies that hired from the ranks of the unemployed in 2010 and subsequently retained those employees for at least 52 continuous weeks can claim a tax credit of up to $1,000 per qualifying employee on their business taxes when they file their 2011 returns.

The credit is one of the provisions of the Hiring Incentives to Restore Employment (HIRE) Act signed into law in March 2010. Under another provision, employers had already enjoyed a special payroll tax break for hiring the unemployed during much of 2010.

Businesses whose tax return preparation follows a non-calendar fiscal year may have already claimed the retention credit as early as February 2011, but the upcoming tax season will be the first chance for calendar-year taxpayers to take it. Only hires that took place from Feb. 4, 2010 to Dec. 31, 2010 may qualify, but there is no limit on the number of employees for which the credit may be claimed.

To qualify, an employee must have affirmed that he or she was either unemployed or employed for no more than 40 hours total during the 60-day period ending on the date of hire. The IRS created a new form W-11 last year to make it easier for employees to certify this.

The credit can be claimed for employees who worked part-time as well as full-time, but an employee may not qualify if his or her wages were reduced substantially during the 52-week continuous employment period. The IRS requires that during the last 26 weeks of the period, an employee must have earned at least 80% of what he or she did during the first 26 weeks. This stipulation prevented companies from purposely hiring the unemployed with the intention of drastically reducing the hours or hourly wage of such workers later, just to qualify for the credit.

A tax preparer for a business should be vigilant as they put together the employer’s 2011 return to insure that the credit is taken for all qualifying employees, even ones who are no longer with the company. In theory, a qualifying worker could have been hired as early as Feb. 4, 2010 and subsequently separated as long ago as Feb. 3, 2011, thus having met the continuous 52-week employment criterion even though they have not appeared on the payroll for some time.

The amount of the credit for a qualifying employee is the lesser of $1,000 or 6.2% of the total wages paid to that employee during the 52-week period.

With such constantly changing laws and guidelines at the federal and state levels, tax preparation and bookkeeping are no easy tasks, even for a small business. PADGETT BUSINESS SERVICES® can take those worries off your shoulders. We’re an experienced tax and payroll services company that has been helping small business since 1966.