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Proposed Tax Credit for New Hires: Chance to Get $5000 in Free Money?
Old 01-30-2010, 11:34 AM   #1
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Proposed Tax Credit for New Hires: Chance to Get $5000 in Free Money?

The government money tap continues to gush, and it appears some folks >might< be able to get a tax credit of $5000 without too much work. For example, I'm self employed right now, but if I hired DW to perform functions related to my business it looks like I could get the $5000 tax credit now being proposed (info on the proposed plan). There would be some headaches (setting up the paperwork to hire an employee, including paying unemployment insurance, etc), but if DW earns $7000 then the business would get the $5000 tax credit. In addition, she could put all this money into a solo-401K (these accounts are open to sole proprietors and a spouse), so it's another way to get funds into tax-deferred accounts.

Then, next year when she loses this job, I guess she'd file for unemployment insurance, so there'd probably be no net loss of the unemployment insurance premiums paid.

Obviously, the work done by DW and the wage paid has to be legit, but it does look like a way to get free money and help create another job in the US economy--which is, after all, the purpose of this proposed legislation. "Doing well by doing good."

Ideas/comments? Note: This post is in the "FIRE and Money" forum, not the "Politics" forum. Please temper comments accordingly.
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Old 01-30-2010, 12:01 PM   #2
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Originally Posted by samclem View Post
Note: This post is in the "FIRE and Money" forum, not the "Politics" forum.

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Old 01-30-2010, 12:24 PM   #3
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I may have to hire some folks to move a stack of bricks from one spot to another over and over, or sit and watch my cat. Need to see details and how feasible/easy it would be to comply with tax laws, create legitimate jobs for my business purposes, and claim the credit. I know a few unemployed or retired people that might like a little free government money. After all, I'd be doing America a favor by creating jobs and make this program more successful.

Ideally I could hire someone Dec 31 2010 to my existing business, then give them a pink slip Jan 1 2011 "if things didn't work out".
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Old 01-30-2010, 12:45 PM   #4
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I may have to hire some folks to move a stack of bricks from one spot to another over and over, or sit and watch my cat. Need to see details and how feasible/easy it would be to comply with tax laws, create legitimate jobs for my business purposes, and claim the credit. I know a few unemployed or retired people that might like a little free government money. After all, I'd be doing America a favor by creating jobs and make this program more successful.

Ideally I could hire someone Dec 31 2010 to my existing business, then give them a pink slip Jan 1 2011 "if things didn't work out".
I'm a FIREd engineer.
Will you compensate me with steaks and beer?
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Old 01-30-2010, 01:14 PM   #5
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I don't think this will have much effect on new hires, maybes some free money for replacement hires. In FL small businesses as well as large are getting smacked with much higher unemployment tax. Florida employers face a huge jump in unemployment compensation taxes - St. Petersburg Times
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Old 01-30-2010, 01:17 PM   #6
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I'm a FIREd engineer.
Will you compensate me with steaks and beer?
Once the tax credit gets passed, you can email me a resume or CV and we can talk terms.
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Old 01-30-2010, 02:58 PM   #7
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Originally Posted by samclem View Post
For example, I'm self employed right now, but if I hired DW to perform functions related to my business it looks like I could get the $5000 tax credit now being proposed (info on the proposed plan). There would be some headaches (setting up the paperwork to hire an employee, including paying unemployment insurance, etc), but if DW earns $7000 then the business would get the $5000 tax credit. In addition, she could put all this money into a solo-401K (these accounts are open to sole proprietors and a spouse), so it's another way to get funds into tax-deferred accounts.
Except that if you read the proposal you linked to it specifically limits "the maximum jobs credit to 25% of the increase in a firm's Social Security payroll wage base." So while you could go through all the hassle to employ your wife for $7,000, it appears the maximum credit you could claim is $1,750. But then you'd have to pay ~15% of that $7K in social security tax ($1k) plus income tax at whatever your marginal rate is.

Doesn't sound like a money making scheme to me.
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Old 01-30-2010, 03:48 PM   #8
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Except that if you read the proposal you linked to it specifically limits "the maximum jobs credit to 25% of the increase in a firm's Social Security payroll wage base." So while you could go through all the hassle to employ your wife for $7,000, it appears the maximum credit you could claim is $1,750.
Good point. I'd have to look into the definition of the "Social Security payroll wage base" to see if there's any flexibility there. But, it looks like she'll have to earn more money if this business is going to do all it can to make this tax credit program a success. If she earns more, it means more money can go into her solo 401K, which is good for us. We wouldn't owe any more income tax as a couple--every dollar she earns is a dollar less profit from my business, thus resulting in no net change to our income.

This new employee will probably be put to work in our new marketing and business development department, there's lots of work to be done there (easily $20K in labor hours to do all the research and writing letters, etc. $20K in wages would max out the $5K in tax credits). Some of our more promising leads are located in fairly nice areas, there might be some travel involved. We'll review her performance in January 2011 and make our decision about future employment at that time. If she hasn't brought in a lot of new contracts, I guess the business will be justified in terminating her employment in Jan 2011 (contributing to the jobless numbers --maybe this program will be extended?). I sure hope it doesn't come to that--she's a hard worker.

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But then you'd have to pay ~15% of that $7K in social security tax ($1k)
Maybe not all of it--there's a partial "gimme" for that, too. From the linked document:
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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.
Woo-hoo! And she'll be accumulating SS credits, which might be a help to some folks in a similar situation.

And, with a low-wage worker in the house, we'll have to explore all the other options.

It does appear to be a very nice moneymaking opportunity. We'd be in full compliance with every rule, we'd be adding another job to the US economy, and getting $5000 (minus a little paid to SS/MC) for the effort. That's a lot of beer and pizza. Everybody wins.
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Old 01-30-2010, 03:57 PM   #9
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Seems to me this will be great for seasonal types like retail stores, etc.
I can also see an increase in other temp hires.
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Old 01-30-2010, 08:42 PM   #10
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And we complain about the people in government and big business who cheat the taxpayer. I looks like there are criminal thoughts in a lot of peoples minds.
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Old 01-30-2010, 08:43 PM   #11
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If she earns more, it means more money can go into her solo 401K, which is good for us. We wouldn't owe any more income tax as a couple--every dollar she earns is a dollar less profit from my business, thus resulting in no net change to our income.
If she's an actual employee where you're paying half of the social security tax I don't believe she is eligible for the solo 401(k). Although you could set one up for her as part of your business you'd have to do the same for every other employee (not a problem if their aren't any).


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Some of our more promising leads are located in fairly nice areas, there might be some travel involved. We'll review her performance in January 2011 and make our decision about future employment at that time. If she hasn't brought in a lot of new contracts, I guess the business will be justified in terminating her employment in Jan 2011 (contributing to the jobless numbers --maybe this program will be extended?). I sure hope it doesn't come to that--she's a hard worker.
Just don't get audited. The IRS doesn't have a good sense of humor about these kinds of things.
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Old 01-30-2010, 09:37 PM   #12
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And we complain about the people in government and big business who cheat the taxpayer. I looks like there are criminal thoughts in a lot of peoples minds.
It's never criminal to use the tax laws to your advantage. It was Judge Learned Hand that stated "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

The people passing these laws are the real criminals for creating laws that give away MY tax money to create a false economy.

In reality, if the lawmakers stop meddling in the economy, the jobs would take care of themselves. They should just worry about protecting the consumer and leave the economy alone.
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Old 01-31-2010, 01:38 AM   #13
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It's never criminal to use the tax laws to your advantage.
No but it could be unethical.
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Old 01-31-2010, 06:50 AM   #14
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It's never criminal to use the tax laws to your advantage. It was Judge Learned Hand that stated "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

The people passing these laws are the real criminals for creating laws that give away MY tax money to create a false economy.

In reality, if the lawmakers stop meddling in the economy, the jobs would take care of themselves. They should just worry about protecting the consumer and leave the economy alone.
I agree. I also find it offensive for a government to create a tax system so complex that average citizens find it necessary to pay a tax preparer. Yes the same citizens educated in government funded schools. Hmmmm....
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Old 01-31-2010, 08:40 AM   #15
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No but it could be unethical.
Arranging your affairs so as to minimize taxes (within the law) is exactly the same (ethically) as putting money in an IRA (to save taxes) or taking the standard deduction.
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Old 01-31-2010, 09:00 AM   #16
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And we complain about the people in government and big business who cheat the taxpayer. I looks like there are criminal thoughts in a lot of peoples minds.
Ditto. The only thought I can add to this is that gov't appears to be a willing participant.
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Old 01-31-2010, 09:12 AM   #17
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Arranging your affairs so as to minimize taxes (within the law) is exactly the same (ethically) as putting money in an IRA (to save taxes) or taking the standard deduction.
The topic is new business credits per the link that was posted. IRA is not the issue.

If a person expresses intent to hire the wife, then lay her off after one year, then I am pretty sure that is intent to defraud. Maybe a legal expert could comment on that.

I'd be very concerned about an audit in a case like this. If a person came to me and I was to prepare their taxes, I would drop them as a client after hearing this.

Everything that is legal is ok. At some point you must exercise business ethics.
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Old 01-31-2010, 09:25 AM   #18
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If a person expresses intent to hire the wife, then lay her off after one year, then I am pretty sure that is intent to defraud. Maybe a legal expert could comment on that.
We'll have to see what the actual legislation and regulations contain once it is released. Perhaps there will be some type of clawback provision if the employee doesn't remain on the books for a certain amount of time. If that's what the government wants, then they should write it into the bill. And the more provisions, hoops, documentation, forms, calculations, and other "gotchas" they include, the more burdensome the law will be and the fewer businesses will bother with it. From the reaction I've heard from small business owners during interviews, the plan is right on the edge of being "too much hassle for the payoff" right now for most employers. Some people might even come to wonder if this specific targeting of "new hires" is wise at all, and if the government wouldn't do the economy more good simply by reducing taxes and letting people and businesses best decide, according to the dictates of the economy, where to invest that money.

But, for now, we have this apparent opportunity staring us in the face. The content of the final regs will dictate how practical it will be for people to use the program to create new jobs as I've envisioned.
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Old 01-31-2010, 11:18 AM   #19
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Perhaps there will be some type of clawback provision if the employee doesn't remain on the books for a certain amount of time.
The legislation actually has "anti-gaming" language in it that is specifically designed to limit the kind of activity you're proposing. Clearly the spirit of the law would prohibit the hiring of sham employees for the sole purpose of receiving a tax credit (thus the anti-gaming provisions).

As I understand it, the IRS has pretty broad authority in interpreting these laws (e.g. is that trip to Hawaii really a business trip or is it a vacation?). The burden is on the tax filer to justify his tax return. There is no presumption of innocence here. So while you could try this, and no doubt people will, I would personally consider it stepping over the line from lawful tax avoidance to unlawful tax evasion.
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Old 01-31-2010, 12:02 PM   #20
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I have a sneaking suspicion that most of this money is going to go to high turn-over companies that would be hiring these people anyway.

If you are a McDonald's and you're average employee quits in 6-9 months, this "stimulus" is going to be great for your bottom line, but it isn't going to change your hiring practices.

I think this program is going to be a big waste of time and money.
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