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President Obama’s “Small Business Jobs and Wages Tax Cut”

February 5, 2010

During his State of the Union address last week, the president outlined a proposal called the “Small Business Jobs and Wages Tax Cut.”  Below is a synopsis of the how the various proposals will work.

SBAM’s national affiliate the National Small Business Association (NSBA) prepared the following summary of the program:

The goal of Obama’s plan is to encourage job creation by giving businesses a $5,000 per worker tax credit for new hires and refunds of payroll taxes paid if firms increase their workers’ wages. Obama’s $33 billion proposal is similar to a proposal made during his 2008 presidential campaign. The “Small Business Jobs and Wage Tax Cuts” is designed to provide a cost-effective, immediate jump-start to job creation and wage growth. The key provisions are:

1.  A $5,000 tax credit for each net new job created in 2010. Employers would receive a tax credit of up to $5,000 against their payroll taxes for every net new employee they hire in 2010. The credit is designed to help jumpstart job growth by giving employers an incentive to add jobs or accelerate the hiring they would have done later in the future. Start-ups would be eligible for half the credit, which provides an incentive for entrepreneurship while avoiding gaming. The credit would be administered off an employer’s unemployment insurance wage base (equal to 72 percent of the unemployment insurance wage base increase, or $5,000 credit for each additional worker who earns at least $7,000).

2.  An additional tax credit to reimburse payroll taxes on increases in inflation-adjusted payrolls. Businesses will receive a bonus 6.2 percent tax credit on aggregate wages in excess of inflation – reimbursing the employer for the Social Security payroll taxes they pay on those payroll increases. This provides firms with an incentive to increase wages or work hours for existing employees as well as hire new employees at a higher wage. This wage bonus would be calculated off the Social Security payroll tax base, so firms would not get credit for increasing wages for employees making more than the current taxable maximum of $106,800. 

3.  A cap at $500,000 per business to incentivize small business hiring. All firms with net employment increases will be eligible for these credits. But to ensure that small businesses receive the bulk of the incentive to hire, the maximum credit will be limited to $500,000 (100 employees) per business. 

4. Anti-abuse provisions to ensure that employers do not game the system. Businesses that reduce employment or payrolls in 2010 would be ineligible for both the $5,000 credit and the wage bonus. The credit would also include anti-abuse provisions designed to deny or limit the credit to employers that seek to game the system by, for example, replacing full-time employees with part-time employees. This will include limiting the maximum jobs credit amount to 25 percent of the increase in a firm’s Social Security payroll wage base. In addition, rules would prevent businesses from renaming themselves or merging in order to claim the credit. 

  1. Quarterly payment option to accelerate payments to firms. Employers would have the option of receiving the tax credit on a quarterly estimated basis. This helps get money in the hands of employers earlier in the year, could help increase awareness of the credit and provides an early incentive to hire. Non-profits will be eligible for the credit and start-ups will be eligible for half the credit. State and local governments would not be eligible.

The White House also said their proposal would make the incentives retroactive to Jan. 1, 2010.

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