True to its title, the Hiring Incentives
to Restore Employment (HIRE) Act, enacted March 18, 2010, provides two
tax benefits to employers who hire certain previously unemployed workers
(“qualified employees”), which may offset some of the payroll costs
associated with an increase in their workforce.
Payroll Tax Exemption
incentive under the HIRE Act, referred to as the payroll tax exemption,
provides an exemption from the employer’s share of Social Security tax
on wages paid to qualified employees. The employer’s share of the Social
Security Tax is equal to 6.2% of wages. This exemption is effective for
wages paid from March 19, 2010, through December 31, 2010. The IRS has
confirmed that the exemption will not affect the employee’s Social
New Hire Retention Credit
addition to the payroll tax exemption, for each qualified employee
retained for at least 52 consecutive weeks, a business might also be
eligible for a general business tax credit, referred to as the new hire
retention credit, equal to 6.2 percent of wages paid to the qualified
employee over the 52-week period, up to a maximum credit of $1,000. To
receive the retention credit, the employee’s wages for the second
6-month period of employment must be equal to at least 80% of the wages
earned in the first 6 months.
WHICH EMPLOYERS QUALIFY
FOR THE INCENTIVES?
Taxable businesses and tax-exempt
organizations, including newly-formed businesses and organizations,
qualify for the payroll tax exemption. Federal, state or local
government employers generally do not qualify for the payroll tax
exemption. However, public colleges and universities can qualify for the
Employers who take advantage of the payroll tax
exemption are not eligible to claim the work opportunity credit for that
qualified employee. The Work Opportunity Tax Credit (WOTC) is a tax
credit available to employers who hire employees included in one or more
targeted groups traditionally faced with significant barriers to
employment. To the extent the WOTC is more valuable to an employer with a
qualified employee, the payroll tax exemption should not be claimed.
IS A "QUALIFIED EMPLOYEE?"
A qualified employee under
the HIRE Act is an individual who:
- began employment with a
qualified employer after February 3, 2010, and before January 1, 2011;
been unemployed or employed for less than 40 hours during the 60-day
period ending on the date employment relating to the exemption begins;
not a family member of or related in certain other ways to the
- is not hired to replace another employee, unless
that other employee was terminated for cause or quit voluntarily.
on these criteria, an individual does not need to have been terminated
from a previous position to be a qualified employee. For example, recent
school graduates that have never worked may be a qualified employee.
Also, it is not required that an employee be new to the employer.
Therefore, an employer may claim the payroll tax exemption for wages
paid to a rehired employee who otherwise satisfies the above criteria.
If an employer hires a qualified employee
in 2010, the payroll tax exemption is claimed on Form 941, Employer's
Quarterly Federal Tax Return, beginning with the second quarter of 2010.
For wages paid during the portion of the first quarter of 2010 for
which the exemption is available (March 19 - March 31), the payroll tax
exemption will be claimed as a credit on the employer's Form 941 for the
second quarter of 2010. The new hire retention credit will be claimed
on the employer’s 2011 income tax return. A revised Form 941
has been provided in draft form on the IRS website and will be released
next month as a final along with the form’s instructions.
addition to properly claiming the benefits on the employer’s tax
returns, the employer must also have the qualified employee certify by a
signed affidavit, 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 started employment with the employer. The IRS recently issued a
draft of Form W-11,
the HIRE Act Employee Affidavit, to assist employers claiming the tax
exemption and new hire credit with satisfying this requirement.
While the tax benefits provided under the
HIRE Act do not likely rise to the level necessary to induce hiring by
employers not previously considering an expansion in payroll, the
incentives do benefit a range of employers and potential employees.
Employers making routine hires, looking to grow their business, or
deciding to rebuild their workforce after recovering from previous
layoffs should be careful to not overlook the cost savings associated
with the HIRE Act. To avoid such an oversight, employers should
routinely check each new hire’s employment history to determine their
potential status as a qualified employee, and therefore, the employer’s
eligibility to benefit from the incentives provided in the HIRE Act.
additional information, please contact any member of McAfee
& Taft’s Employee Benefits Practice Group.
This Alert has been provided for information of
clients and friends of McAfee & Taft A Professional Corporation. It
does not provide legal advice, and it is not intended to create a
lawyer-client relationship. Readers should not act upon the information
in this Alert without seeking professional counsel.