Hiring Summer Help? Tax Breaks and Rules to Keep in Mind
Catch Three Tax Breaks For Summer Help
With the summer now here, you may be expanding your workforce to accommodate increased seasonal demand. Fortunately, there’s usually a good source of available labor, including high school and college students, workers recently laid off, and retirees looking to pick up some extra cash. You might even keep summer interns on board longer if they work out to your satisfaction. Be aware that certain legal requirements apply when you add summer help to the staff. In particular, your business must comply with federal and state laws regarding minimum pay standards, workers’ compensation and discriminatory practices (see right-hand article). However, if you stay within the legal boundaries, you can realize extra tax benefits for hiring certain workers this summer.
The three main tax breaks for employers are the Work Opportunity Tax Credit (WOTC), the payroll tax exemption for previously-unemployed workers and the new tax credit for retaining those workers:
1.The WOTC - If you hire a worker from one of the designated “target” groups, your business can claim a tax credit equal to 40 percent of up to $6,000 of first-year wages. Maximum credit: $2,400 per worker. The WOTC, which has been extended several times in the past, is currently scheduled to expire after August 30, 2011.
The list of targeted groups includes:
- Temporary Assistance to Needy Families (TANF) recipients;
- Qualified veterans;
- Ex-felons;
- Designated Community Residents;
- Food stamp recipients;
- Vocational rehabilitation referrals (or Ticket-to-Work holders);
- Supplemental Security Income recipients (or Ticket-to-Work holders);
- Disconnected youths; and
- Summer youth employees.
The credit for summer youth employees differs from the regular WOTC. It is only available for individuals age 16 or 17 who work for your business between May 1 and September 15. The credit for these workers is 40 percent of the first $3,000 of wages. The maximum credit per worker is $1,200. To qualify, the youth must reside in an Empowerment Zone, Enterprise Community or Renewal Community. Contact your tax adviser for information about meeting the certification requirements.
2. Payroll tax exemption - Normally, an employer must pay the 6.2 percent portion of Social Security tax on the first $106,800 of an employee’s wages in 2010. The 1.45 percent portion of FICA tax applies to all wages. However, under the new Hiring Incentives to Restore Employment (HIRE) Act, the 6.2 percent Social Security tax liability is waived for wages paid to qualified employees hired after February 3, 2010 and before January 1, 2011.
A qualified employee is one who:
- Has not been employed for more than 40 hours during the previous 60 days.
- Was not hired solely to replace another employee (other than voluntary separation or for cause).
- Is generally not related to the employer.
- Does not own, either directly or indirectly, more than 50 percent of the employer.
Note that a qualified employee may work for any number of hours. In other words, it applies to both part-timers and full-timers. However, you’re not allowed to claim the WOTC if your business takes advantage of the payroll tax exemption. You can choose to bypass the payroll tax exemption if the WOTC is more favorable.
3. Worker retention credit - Finally, your business is eligible for a new tax credit if it keeps these previously-unemployed workers employed for at least 52 consecutive weeks. Each credit equals the lesser of $1,000 or 6.2 percent of the wages paid to the worker during the 52-week period.
To qualify, the HIRE Act requires your business to pay a retained worker an amount equal to at least 80 percent of the first 26 weeks of wages paid during the last 26 weeks of the 52-week period. Unlike the payroll tax exemption, the retention credit may be claimed for a worker for which you claim a WOTC.
Consult with your tax advisers concerning the coordination of these tax benefits for employers. Then it’s ready, aim, hire!
Keep These Rules in Mind When Hiring Interns
If your business or organization is planning on using unpaid or low-paid student interns this summer, here’s an important rule to follow: Make sure the work is mostly about training.
For employers, offering student internships often involves bringing in unpaid or low-cost help (below minimum wage) during summer months when employees are taking vacations. The advantage to the employer is obvious: Free or cheap labor.
For students, the internship means on-the-job training that could bring future opportunities and recommendations.
But before bringing unpaid interns (or those paid below minimum wage) into the workplace, consider the implications and obligations. If most of the interns’ workplace activity is actually training experience rather than contributing to the employer’s purposes, then the U.S. Department of Labor (DOL) rules allow non-payment or less-than-minimum-wage to the interns.
However, just because the Labor Department and the federal Wage and Hour Law exempt employers from treating interns (or trainees) as employees, other federal and state laws may consider them as employees. For example, interns usually are protected by discrimination and harassment laws.
And depending on state laws and specific circumstances, unpaid interns may be protected by Workers’ Compensation laws. Even if an unpaid intern in a specific case is not covered by a state’s workers comp law, the injured worker could sue the employer for medical costs and damages.
Labor Department Rules
In today’s economy, some organizations might want to use unpaid or less-than-minimum-wage interns to fill the void left from laid-off employees. But make sure interns aren’t replacing employees and don’t hinder opportunities for prospective employees. The federal Fair Labor Standards Act bans both practices and many states impose additional restrictions.
Employers must pay interns at least the minimum wage unless the internship experience passes these six rules:
1. The work performed (the DOL uses the word “training”) is an extension of a trade studied by the student or similar to the intern’s school training.
2. The work (or training) is for the benefit of the student intern.
3. The intern does not replace regular employees, but works under their close observation.
4. The employer derives no immediate advantage from the student intern’s activities. (The intern’s activity is primarily an educational experience and doesn’t significantly benefit the employer.)
5. The intern is not necessarily entitled to a job at the conclusion of the internship. The employer holds out no promise of future employment.
6. The employer and the intern understand that the student is not entitled to wages for the time spent in the internship.
Advantages of Paying
As you can see, unpaid interns are not a good idea in most situations. For example, unpaid interns can’t replace paid employees who are on vacation. And they can’t do any work that significantly benefits or profits the employer, which is a difficult hurdle to clear.
So what should employers do? Use interns…but pay them. Talented, educated, and motivated students are typically eager to gain real-world experience in the fields they are studying. So they’re willing to work for less than seasoned individuals. By hiring interns for summer replacements, you can gain productive employees at reasonable pay levels.
There are benefits for paying fair wages to interns. Paid interns are more likely to:
- Feel more appreciated and, therefore, be more productive.
- Be enthusiastic in supporting and promoting the business or organization after the internship is over.
Plus, using interns can be a good recruiting tool. The best might return in a paid capacity someday.
