US Treasury Releases HIRE Act Report

The US Treasury Department has just released an updated report on the number of newly-hired workers eligible for tax credits under the recent Hiring Incentives to Restore Employment (HIRE) Act.

Passed in March, the HIRE Act offers an exemption from Social Security payroll taxes for every worker hired after February 3, 2010, and before January 1, 2011, who has been unemployed for 60 days or longer. The maximum value of the credit is equal to 6.2% of wages up to $106,800, the Federal Insurance Contributions Act wage cap. There is also an additional $1,000 income tax credit for every new employee retained for 52 weeks, creditable on on the employer’s 2011 income tax return.

The Internal Revenue Service’s data on the HIRE Act will not be available until after the filing of tax returns in 2011. However, the Treasury Department’s Office of Economic Policy has provided estimates on employers who potentially qualify for the HIRE tax exemption.

According to the report, between February and October this year, businesses hired an estimated 8.1 million new workers who had been unemployed for 60 days or longer. Such businesses are thus eligible for HIRE tax exemptions and credits.

These newly hired workers constitute approximately 11.7% of all workers who were unemployed for eight weeks or longer since the law’s passage. This means that one in eight workers who have been unemployed for eight weeks or longer are hired in the subsequent month.

The report also shows estimates by state on the number of eligible hires. Many states with high unemployment rates have large numbers of potentially eligible new hires. This includes California (over 1.1 million), Ohio (around 350,000), and Michigan (over 260,000).

“Targeted programs like the HIRE Act tax credit provide an incentive for private-sector employers to hire new workers sooner than they otherwise would,” said Alan B. Krueger, Assistant Secretary for Economic Policy and Chief Economist at the Treasury Department. “Since it’s only in effect through the end of the year, the HIRE Act encourages businesses to accelerate hiring in order to get the maximum benefit from this temporary tax credit.”

Payroll Tax Primer

The term “payroll tax” is generally used in reference to two different kinds of taxes that have similar properties and functions. The first is a type of tax that employers are required to withhold from the wages of their employees, which is known as withholding tax, pay-as-you-earn tax or pas-as-you-go tax. The second type is a tax paid from the company or employer’s funds and is directly related to the act of employing a worker, typically consisting of a fixed charge or a fee that is proportional to the employee’s pay. These taxes are paid to the federal government and imposed on employers and employees, as well as on various compensation bases. In general, these are reported quarterly or annually, with electronic reporting required for almost all employers.

Federal , state and local jurisdictions are required to impose a withholding tax if they are imposing an income tax. Employers that have contact with the jurisdiction must withhold the tax from wages paid to their employees. Computation of the amount required is performed by the employer based on the IRS Form W-4, which contains information relevant to the employees’ tax status. The amounts must be paid to the jurisdiction taxing, but are also refundable as tax credits to the employees. The income taxes that are withheld from the payroll are not considered final taxes, but are instead classified as repayments. The employees must still file income tax returns and self assess tax.

Social security and Medicare taxes are also considered payroll taxes. Federal social insurance taxes are imposed on both employers and employees, consisting of 6.3% of wages, with an annual maximum of $06,800 plus a tax of 1.45% of total wages. In 2011, these were changed so that the employee contribution was only 4.2%, while the employer’s portion of the tax remained the same. To the extent that the employee’s portion of the tax exceeded the maximum by reason of multiple employers, the employee is entitled by law to a refundable tax credit upon filing an income tax return for the fiscal year.

There is also the matter of the Federal Unemployment Tax Act, which subjects employers to unemployment taxes. The tax is a percentage of all taxable wages with a cap, with varying caps and rates per jurisdiction and industry, as well as experience rating. The typical maximum, as of 2009, was under $1,000. Some states also impose unemployment taxes on employees.

How Does Estate Tax Work?

Tax on Inheritance

When an individual dies, his assets is transferred to his beneficiary as stated in his will. The estate tax is the fee that the government collects from this transfer. This transfer is usually from the last surviving parent to his offspring. This is not applicable for married couples since both the husband and wife equally own the estate. There’s also such a thing as a federal gift tax so that taxpayers won’t be able to avoid paying the estate tax by transferring large amounts of their wealth before the death of the estate owner.

Rate Based on Value of the Estate

The tax rate on estates is based on a progressive scale of taxation, with a range of 18% for low value estates up to 45% for estates that are valued over $2 million. An estate’s value is the sum of all its assets, including monetary holdings, real estate and investments, as well as assets which are not directly owned by the benefactor, like life insurance and annuities. At present, there is a flat rate for the estate tax, virtually reducing estate tax to zero for estates valued for less than $2 million. This amount, however, increased to $3.5 million back in 2009.

Other Considerations

According to the federal gift tax code, an amount of up to $12,000  can be given to any number of beneficiaries each year. Through this gift allowance, an individual can easily allocate money to his progeny without having to pay the extra taxes, and even cut down his estate’s value below the rate of the estate tax.

The estate tax is considered to be one of the more litigious taxes since it has to deal with money and assets that have already been taxed in the past. Most of the beneficiaries of estates didn’t work for any of the properties that they inherit, and this tax free transfer of wealth only increases the gap between the rich and the middle class. It has even been named as the “death tax” because of all the negative impressions attached to it.