Hiring Tax Incentives Under the HIRE Act of 2010
On April 7, 2010, the IRS issued additional guidance, in the form of frequently asked questions (FAQ), on the 2010 payroll tax exemption and the 2011 retention tax credit. You can review these frequently asked questions (FAQs) on the IRS website under HIRE Act: Questions and Answers for Employers. These tax incentives were enacted by the “Hiring Incentives to Restore Employment Act of 2010” (HIRE Act). On May 18th the IRS also released the revised payroll tax form (941) to report the payroll tax exemption.
This article discusses the HIRE Act tax exemption and hiring credit and highlights some of the key items and planning opportunities discussed in the IRS FAQs.
The HIRE Act was signed into law by President Obama on March 18, 2010. It contains two major hiring tax incentives to encourage businesses to increase their levels of employment and to reduce the national unemployment rate.
- The first incentive exempts qualified employers from having to pay the employer's 6.2 percent share of the Social Security payroll tax on a qualified employee for wages paid from March 19, 2010 through December 31, 2010.
- The second incentive is a tax credit of up to $1,000 for retaining a qualified employee on the employer’s payroll for at least one year.
A qualified employer is generally any employer in the private-sector, including nonprofit organizations. Public-sector jobs are generally not eligible such as a state or local governments, however, public institutions of higher education are eligible.
A qualified individual is one who begins employment after February 3, 2010 and before January 1, 2011 and was unemployed or worked less than 40 hours a week for the 60-day period prior to being hired by that employer. The employee cannot be a replacement for another employee, unless that other employee leaves voluntarily or for cause (which is generally the case) and cannot be related to the qualified employer under the definitions of the Work Opportunity Tax Credit (WOTC).
There is no minimum weekly number of hours that the new employee must work for the employer to be eligible and there is no maximum on the dollar amount of payroll taxes per employer that may be exempt.
Temporary Employees May Qualify
Temporary agencies hiring employees meeting these aforementioned qualification rules can claim the payroll tax exemption, as well as the $1,000 credit if the employment period lasts a year or more. However, the more likely scenario is that the temporary employee works for the temporary agency for a short period and is then hired by a client of the agency. In this case, the temporary agency may claim the payroll exemption for a period of time, then the client company may begin claiming the payroll exemption if at the time the client hires the employee, the new employee has not worked for any business (including the temporary agency) for more than 40 hours during the 60 days prior to being hired by the client. See IRS FAQs QE11 & QE12.
Additional Qualifications for the Retention Tax Credit
In order to be eligible for the $1,000 tax credit, a qualified individual must remain employed by the qualified employer for no less than 52 consecutive weeks and the employee’s wages for such employment during the last 26 weeks of the period must equal at least 80 percent of the wages for the first 26 weeks of the period.
How to Claim the Payroll Tax Exemption
In order to claim the payroll tax exemption, qualified employees are required to sign an affidavit stating that under penalties of perjury he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins. Form W-11 or any equivalent form that includes the same language as Form W-11, must be signed by a qualified employee by the time the qualified employer files an employment tax return (Form 941). The Form W-11 does not need to be filed with any taxing agency, but is merely a recordkeeping procedure for support of the exemption claimed.
However, due to the timing of the law, there is an exception relating to the first quarter Form 941. An employer may claim the portion of the payroll tax exemption relating to qualifying wages paid during the first calendar quarter of 2010 by applying it against the tax imposed for the second calendar quarter of 2010 and does not need to file an amended employment tax return (Form 941-X). For all other filings, if an employee signs the affidavit after the Form 941 has been filed, a Form 941-X must be filed in order to claim the exemption on wages paid during that period.
How to Calculate the Retention Tax Credit
The credit for retaining qualifying new hires for at least 52 consecutive weeks is 6.2 percent of wages paid to the qualified employee over the
52-week period, up to a maximum credit of $1,000. Thus, the credit for a retained worker will be $1,000 if the retained worker's wages during the 52-consecutive-week period are at least $16,129. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers). The credit cannot be claimed until the 2011 tax year and the IRS has yet to issue the tax forms for this credit.
Additional Requirements and Limitations
The payroll tax exemption is exclusively based on when the wages are paid to a qualified employee and not when the wages are actually earned by that employee. As such, only wages paid from March 19, 2010 through December 31, 2010, may qualify for the exemption, regardless of when those wages were actually earned. See IRS FAQ PE7.
An employer cannot double up on hiring tax credits unless the employer elects out of the payroll tax exemption. That means that for qualified employees who would otherwise qualify for WOTC, an employer must select one benefit or the other. Yet, an employer may still claim the retention credit for qualified employees even though they have claimed the WOTC credit on those employees. See IRS FAQ PE11.
How to Elect Out of the Payroll Tax Exemption
Employers may not want to apply the HIRE ACT payroll tax exemption to certain employees who otherwise qualify for the WOTC since the WOTC credit is 25 percent to 50 percent on up to $10,000 of wages vs. 6.2 percent of the Federal Insurance Contributions Act (FICA) wages under the HIRE Act payroll tax exemption. The employer can choose to apply the tax exemption to all, some or none of their HIRE Act qualified employees. An employer can “elect-out,” if it chooses not to have the payroll tax exemption apply. This is done simply by filing the Form 941 and paying the employer portion of the Social Security tax on wages, just as it has done in the past. In addition, employers who have applied the payroll tax exemption can later elect out of the exemption by filing a Form 941-X and pay the employer’s share of the Social Security tax for each prior quarter. See IRS FAQs PE8 & PE9.
The payroll tax exemption and retention credit incentive portion of the HIRE act have immediate economic benefits for the employer. A company can save a maximum of $6,621 if it paid a worker at least $106,800 — the maximum amount of wages subject to Social Security taxes — by the end of the year. This payroll tax exemption puts money into a business' cash-flow immediately, since the tax is simply not collected in the first place. In addition, there are no income and few industry limitations on who can claim the exemption and credits. Since these tax invectives are relatively easy to claim, no taxpayer should pass on this lucrative tax-saving opportunity.
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