For construction firms ready to add workers, a new law aimed at reducing unemployment offers grease for the skids. Enacted earlier this year, The Hiring Incentives to Restore Employment (or HIRE) Act grants a payroll tax exemption for hiring workers who have been out of work for at least 60 days.

It wasn’t long ago that rehiring was a non-issue, given the rate at which jobs were being slashed. Certain business sectors and regions are now on the upswing. In Texas, job growth is fairly impressive. In May Texas had 75,200 more jobs than in May 2009, according to the U.S. Dept. of Labor.

The construction industry is a key driver of growth. Despite being one of the hardest hit sectors, construction is adding jobs in many areas, and Texas is a leader. In April the state’s construction sector added 10,600 jobs.

For contractors sitting on the expansion fence, HIRE may provide all the impetus needed. The law’s major selling point is that it excuses employers from paying their share of the 6.2% tax on wages received by qualified employees. The exemption applies to wages paid after the date of enactment through the end of the year. The maximum value for each qualified employee is $6,621. The longer a business has a qualified new worker on its payroll, the greater the tax benefit. The exemption does not apply to Medicare tax.

Tom Wright Burke

As an additional incentive, for any qualifying worker kept on the payroll for 52 continuous weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on the 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. Workers hired after the legislation was introduced (after Feb. 3, 2010 and before Jan. 1, 2011) are eligible for the payroll tax forgiveness and retention bonus, but only wages paid after March 18 receive the exemption for payroll taxes.

There is no minimum weekly number of hours that a new employee must work for an employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven. However, employers are not allowed to double dip. For workers who otherwise would be eligible for the Work Opportunity Tax Credit, the employer must elect one benefit or the other for the year. Also, company owners can’t claim the deduction by hiring family members.

Contractors should be aware that a worker who replaces another employee who performed the same job isn’t eligible for the benefit unless the prior employee left the job voluntarily or for cause. For new employees to qualify, they must sign an affidavit, under penalties of perjury, stating they haven’t been employed for more than 40 hours during the 60-day period ending on the date the employment begins. The incentive isn’t skewed toward either low-wage or high-wage workers. Under the law, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.

There is another aspect of HIRE, unrelated to hiring, that has broad significance for those in the construction industry. The law gives a one-year lease on life to enhanced expensing rules, which allow qualifying businesses the option to currently deduct the cost of business machinery and equipment instead of recovering it via depreciation over a number of years.

For tax years beginning this year, businesses may expense up to $250,000, and the expensing election begins to phase out when a business buys more than $800,000 of expensing-eligible assets. These dollar limits are the same as those that were in effect for 2008 and 2009. If HIRE had not been passed, these dollar limits would have dropped this year to $134,000 and $530,000 respectively.

In general, HIRE applies only to private sector employment, including construction companies and non-profit organizations. Public sector entities are generally not eligible for either benefit. However, employment by an institution of higher education qualifies.

Contractors interested in exploring everything HIRE has to offer should meet with their certified public accountants to learn more. Additional information and the IRS form to claim the exemption are available at the IRS website.