There are two new tax benefits available to employers who hire previously unemployed (60 days or more – and these employees must file an affidavit). Please consult your tax adviser prior to implementing any changes. As with all tax legislation the rules may apply differently to your company or there may have been additional guidelines issued since we first posted this information.
The first benefit provides an employer who hires a previously unemployed person (some terms apply – for example it looks like hiring your relatives is a no-no) with a tax incentive for the employer’s share of Social Security taxes.
While the implementation guidelines appear to still be in the works – we think you’ll claim the credit on your employment tax forms. Check with your tax professional on whether the new HIRE act applies to your company and for the exact steps you’ll need to take to implement the act.
The second benefit will provide a general business tax credit for each eligible worker retained for at least a year. The credit amount may be up to $1,000 per employee and would be claimed on the 2011 employer tax returns.
Sage Software’s Explanation of The HIRE Act
Synopsis of the portion of the legislation impacting the payroll:
Social Security tax exemption
The Federal Insurance Contributions Act (FICA) imposes two taxes on employers, employees, and self-employed workers—one for Old Age, Survivors, and Disability Insurance (OASDI, commonly known as the Social Security tax), and the other for Hospital Insurance (HI, commonly known as the Medicare tax). The FICA tax rate for employees and employers is 7.65% each—6.2% for OASDI and 1.45% for HI. There is a maximum amount of compensation subject to the OASDI tax (i.e., $106,800 in 2010), but no maximum for HI.
The HIRE Act provides certain employers with relief from their share of the OASDI taxes on wages paid to a “qualified individual.” A qualified individual is anyone who:
- begins work for a qualified employer after Feb. 3, 2010 and before Jan. 1, 2011;
- certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins;
- is not employed to replace another employee of the employer unless that former employee separated from employment voluntarily, or for cause; and
- is not related to the employer (under rules similar to those in IRC §51(i).
- The exemption would be available to any employer, other than a federal, state, or local employer (or government instrumentality). However, an employer that is a public higher education institution could claim the exemption. An employer could elect not to receive this payroll tax benefit.
The bill also provides a similar payroll tax benefit to railroad employers.
It is expected that the Social Security tax exemption would be reported on Form 941, Employer’s Quarterly Federal Tax Return. The first quarter return (January 1 to March 31, 2010) must be filed by April 30, 2010. However, the bill does not allow the Social Security tax exemption to be claimed with respect to wages paid in the first quarter of 2010. The tax benefit that employers would have received in the first quarter of 2010 will be claimed in the second quarter of 2010 instead.
An IRS representative has stated that the IRS will be ready to make changes to Form 941 shortly after the bill is enacted.
The legislation calls for the employer Social Security tax exemption for qualified employers, as applicable, for wages paid to the qualified individual during the period beginning on the day after the date of the enactment and ending on December 31, 2010.
The full IRS release:
WASHINGTON — Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law today.
Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.
In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.
The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.
In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement.
Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.
Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details on these two new tax provisions will be posted on IRS.gov during the next few weeks.
Disclaimer: We are not in the business of providing tax or accounting advice. Consult with your tax or accounting advisor prior to implementing this information. Always check for the latest rules and regulations as changes may have occurred after our initial post on this topic.