One of the new incentives for hiring and retaining new workers in 2010 is the retention credit. The general business type tax credit is a maximum of $1,000 for each new qualified employee who works for at least 52 consecutive weeks. The credit is available in the year the employee satisfies the 52 week period, therefore calendar year taxpayers will be able to use the credit on their 2011 tax returns.
The credit is equal to 6.2% of the wages paid during the 52 week period, up to a maximum credit of $1,000 for each employee. The credit for employees earning less than $16,129 is determined by using the wages paid and a rate of 6.2%. Therefore the credit for an employee earning $15,000 would be $930 ($15,000 x .062).
A qualified worker needs to meet the following requirements when hired.
1. The new employee needs to have been unemployed or employed for less than 40 hours during the 60-day period prior to being hired. Form W-11 (Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit) should be obtained from each employee. http://www.irs.gov/pub/irs-pdf/fw11.pdf
2. The employee needs to be employed for a period of at least 52 consecutive weeks.
3. The employee’s wages during the last 26 weeks of employment must be at least 80% of the wages paid during the first 26 weeks of employment.
4. The employee needs to be hired after February 3, 2010 and before December 31, 2010.
As with all general business tax credits the amount you can use in any one year is limited. Your total general business credit for the year cannot exceed your net income tax, minus the greater of (1) your tentative minimum tax, or (2) 25 percent of your net regular tax liability that is more than $25,000 ($12,500 for married filing separately). Your net income tax is your net regular tax liability plus your alternative minimum tax.
For example, ABC’s general business credit for the year is $30,000. Their net income tax is $27,500 and the tentative minimum tax, figured on Form 6251, is $18,487. The amount of general business credit ABC can take for the year is $9,013. This is the net income tax of $27,500 minus the larger of the tentative minimum tax, $18,487, or 25 percent of the net regular tax liability that is more than $25,000 (25% of $2,500 = $625). Since $18,487 is larger than $625, ABC subtracts $18,487 from $27,500 to arrive at $9,013.
Unlike certain other general business tax credit’s the Retention Credit cannot be carried back, but can be carried forward for 20 years.
One last thing to note, the Retention Credit and the Work Opportunity Tax Credit can be claimed for the same employee.
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