Question: What are HEART Act Tax Credits to Employers for Differential Wage Payments?
On June 17, 2008, President George Bush signed into law the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act). The HEART Act amends primarily the Internal Revenue Code of 1986 (the Code) to provide certain benefits for military personnel and their beneficiaries, including the provision of tax credits for employers making differential wage payments to employees on active military duty.
Answer:
Differential wage payments are those payments provided by an employer to employees on active military duty, to make up some or all of the wages the employee would have received if he or she were working for the employer.
For 2009 only, an employer may receive a tax credit for differential wage payments made to qualified employees who have been called to active military service. The credit is 20% of the first $20,000 of qualified differential wage payments made to each qualified employee. Here are the qualifications and restrictions on this tax credit:
- A qualified employee is an employee of an eligible small business employer for the 91-day period immediately preceding the period for which any differential wage payment is made.
- The employee must have been on active duty for more than 30 days.
- An eligible small business employer is a business which has on average fewer than 50 employees during the tax year, and which has a written plan providing these differential wage payments to every qualified employee.
- The payments are reportable as W-2 wages, not benefits, and FICA taxes must be deducted from these payments.
- Participants receiving differential wage payments must be treated as active employees for retirement plan purposes, and the payments must be treated as compensation to determine plan benefits. There are other qualifications and restrictions relating to retirement plan benefit distributions; check with your benefits advisor on this issue.
To receive this credit, complete IRS Form 8932 - Credit for Employer Differential Wage Payments.
