The Hiring Incentives to Restore Employment Act (“HIRE Act”), signed into law by President Obama on March 18, 2010, creates, among other things, two new tax benefits to employers hiring workers who were previously unemployed or only working part time.
Payroll Tax Exemption
Pursuant to the HIRE Act, “Qualified Employers” who hire “Qualified Workers” are exempt from the employer’s share of Social Security taxes (6.2%) on wages paid to these workers after March 18, 2010 through December 31, 2010.
The payroll tax exemption is claimed on Form 941 Employer’s Quarterly Federal Tax Return beginning with the second quarter of 2010. The IRS has posted a draft revised Form 941 on its website for comment with the final form and instructions to follow. The payroll tax exemption for wages paid to qualified workers during the period March 19, 2010 through March 31, 2010 will be claimed on the employer’s Form 941 for the second quarter of 2010.
“Qualified Employers” include businesses, tax-exempt organizations and public colleges and universities, but federal, state and local government employers generally do not qualify. “Qualified Workers” are those hired by a Qualified Employer after February 3, 2010, and before January 1, 2011, who certify by affidavit (IRS Form W-11) under penalties of perjury that they have not been employed for more than 40 hours during the 60 day period ending on the date they begin employment and who are not family members of or related in certain other ways to the employer. However, the payroll tax exemption does not apply to wages paid to an employee hired to replace an existing worker unless the existing worker terminated employment voluntarily or was terminated for cause.
This payroll tax exemption will have no effect on the employee’s future Social Security benefits, and employers will still need to withhold the employee’s 6.2% share of Social Security taxes as well as income taxes. The employer and employee’s shares of Medicare taxes will still apply to wages.
If a Qualified Employer applies this payroll tax exemption to wages paid to a Qualified Worker, such wages paid during the one-year period beginning on the employee’s hiring date may not be taken into account for purposes of the Work Opportunity Tax Credit. An employer who wishes to claim the Work Opportunity Tax Credit with respect to Qualified Workers can elect out of the payroll tax exemption with respect to wages paid to that Qualified Worker.
New Hire Retention Credit
In addition to the payroll tax exemption described above, the HIRE Act also provides a credit of up to $1,000 for each Qualified Worker who remains an employee for 52 consecutive weeks. The amount of the credit is the lesser of $1,000 or 6.2% of wages (as defined for income tax withholding purposes) paid by the employer to the retained Qualified Worker during the 52-week period. In order to be entitled to the credit, the Qualified Worker’s pay during the second half of the year must be at least 80% of such Qualified Worker’s pay during the first half of the year. The credit cannot be carried back but may be carried forward. This new hire retention credit will be claimed on the employer’s 2011 income tax return.