Most employers are now familiar with the 2010 payroll tax breaks for hiring unemployed workers, and the tax credit for retaining such workers. These benefits were enacted by the Hiring Incentives to Restore Employment, or HIRE, Act signed into law March 18. In April and May, the IRS issued additional guidance to help employers understand the application of these incentives.
The HIRE Act provides two valuable incentives for boosting business payroll in 2010. The first is a FICA tax exemption for the 6.2 percent employer's share of Social Security tax (up to $6,621.60) for employers hiring qualified workers. The second is a maximum $1,000 tax credit for keeping those workers on the job for at least one year. To obtain these benefits, the employer must be qualified, as well as the employee.
A "qualified employer" is any employer other than the United States, any state or political subdivision, such as a local government. A special rule allows a post-secondary education institution to be a qualified employer even though it is a government instrumentality.
A "qualified individual" must meet the following criteria:
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* Begin employment with the employer after Feb. 3, 2010, and before Jan. 1, 2011.
* Certify to the employer on Form W-11 that he or she has not been employed for more than 40 hours in the 60-day period ending on his or her hire date.
* Not employed to replace another employee unless the other employee left voluntarily or for cause.
* Not a relative of the qualified employer.
For the $1,000 per individual retention credit, workers must be employed for at least 52 consecutive weeks, and their wages during the last 26 weeks must equal at least 80 percent of their wages for the first 26 weeks.
The recent IRS guidance includes help with some practical operating details, including:
* Clarifying when the payroll tax exemption begins and ends. The FICA tax exemption may be claimed for wages paid during the period beginning March 19, 2010, and ending Dec. 31, 2010. The exemption is based on when wages are paid.
* Replacement workers for downsized employees may qualify. The IRS has determined that employees who were downsized for a variety of business reasons were terminated for cause. Therefore, any otherwise qualified employee hired, including rehired workers, to replace downsized employees will qualify for the exemption.
* Deadline for receipt of Form W-11. The HIRE Act mandates that the employee certify by signed affidavit that he or she meets the previously unemployed test. Form W-11, HIRE Act Employee Affidavit, or its equivalent, must be obtained by the time the employer files its employment tax return claiming the exemption for that worker. Thus, the exemption for wages paid to an otherwise qualifying employee before a signed affidavit is obtained still qualifies for the exemption, but the signed affidavit must be in hand to claim the benefit on the filed Form 941.
In some cases, employers will not be able to obtain a signed Form W-11 before the due date of the payroll tax return and, thus, may not claim the benefit with that filing. However, when a signed affidavit is obtained, an employer may correct the applicable Form 941. In addition, the affidavits are not filed with the IRS, but rather retained with the employer's payroll records.
* Temporary agency employees. As a qualified employer, a temporary agency may claim the exemption on wages paid to its qualified employees. This is determined by the date the employee starts employment with the temporary agency and not the date the employee starts work for a client business.
* Tipped restaurant employees. Food and beverage employers are eligible for both the payroll tax exemption and the "tip credit" if the employer has tipped employees who are also HIRE Act eligible employees. An employer applying the HIRE Act exemption is entitled to a smaller "tip credit," because the employer will pay only Medicare tax (and not Social Security tax) on the employee's wages, including reported tips.