IRS has issued additional guidance on the 2010 payroll tax exemption for hiring unemployed workers and the tax credit for retaining such workers. These payroll tax breaks were enacted by the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147) (see Federal Taxes Weekly Alert 04/22/2010). The additional guidance, in the form of frequently asked questions (FAQs), carries valuable information on subjects such as the scope of the exemption, how it interacts with other tax breaks, and when an employer must receive the employee's certification of former unemployment status.
Background. The HIRE Act carried two valuable incentives for employers that boost payroll this year: a payroll (FICA) tax exemption for employers that hire unemployed workers; and an up-to-$1,000 tax credit for keeping such new hires on the payroll for at least one year.
Under Code Sec. 3111(d), qualified employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to a newly hired qualified individual. The payroll tax relief applies only for wages paid to qualified individuals from Mar. 19, 2010 (the day after the HIRE Act was signed into law by the President) and ending on Dec. 31, 2010.
A qualified employer is any employer other than the
A qualified individual is an individual who:
1. Begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;
2. Certifies by signed affidavit, under penalties of perjury, that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer;
3. Does not replace another employee of the employer (unless that other employee left voluntarily or for cause); and
4. Is not related to the qualified employer in a way that would disqualify the individual for the work opportunity tax credit (WOTC) under Code Sec. 51(i)(1). (Code Sec. 3111(d)(3))
Unless the employer elects out of the payroll tax exemption, wages paid or incurred to a qualified individual won't qualify for the WOTC during the one-year period beginning on the date that the qualified employer hired the individual. (Code Sec. 51(c)(5)) The election can be made on an employee-by-employee basis.
In addition to the payroll tax exemption, HIRE Act Sec. 103 provides employers with an up-to-$1,000 tax credit for retaining “qualified individuals” as defined for Code Sec. 3111(d) purposes. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.
Following are highlights of IRS's new guidance on these payroll tax breaks.
When payroll tax exemption begins and ends. Code Sec. 3111(d)(1) provides that the requirement to pay the employer share of OASDI tax “shall not apply to wages paid by a qualified employer with respect to employment during the period beginning on [March 19, 2010, the day after the enactment date] and ending on December 31, 2010 ....” if all of the payroll tax exemption requirements are met. IRS says that the payroll tax exemption is based on when wages are paid to a qualified employee, not when the wages are earned by such an employee. Thus, only wages paid from Mar. 19 2010, through Dec. 31, 2010, qualify for the exemption, regardless of when those wages were earned. (FAQ PE7)
Form W-11. IRS recently issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, which newly hired, but formerly unemployed, workers must sign (or its equivalent) in order for their new employers to treat the workers as qualified individuals (see Federal Taxes Weekly Alert 04/15/2010). The Form W-11 need not be notarized and shouldn't be sent to IRS; the employer should keep the form with its records. (FAQs QE14 and 15)
Form W-11 may be submitted to the employer electronically, if: the electronic transmission is signed via electronic signature by the employee whose name is on the Form W-11; the signature is made under penalties of perjury using the same language that appears on the paper Form W-11; and the electronic signature is the final entry in the employee's Form W-11 submission. Upon IRS's request during an examination, the employer must supply a hard copy of the electronic Form W-11, and a statement that, to the best of the employer's knowledge, the electronic Form W-11 was made by the employee whose name is on the form. The hard copy of the electronic Form W-11 must provide exactly the same information as, but need not be a facsimile of, the paper Form W-11. (FAQ QE18)
Deadline for receipt of Form W-11. The employer must have the signed Form W-11 (or its equivalent) by the time it files an employment tax return applying the payroll tax exemption. If the signed form is obtained after wages are paid to the employee, the employer can still apply the payroll tax exemption to determine its liability on these wages; it may in some cases have to file a corrected return for a prior quarter. (FAQ QE17)
Illustration: ABX hires Anne, an otherwise qualified employee, who begins employment on Mar. 1, 2010 and is paid wages in March. Anne does not provide the signed affidavit until Apr. 15, 2010. ABX can claim the first quarter credit on the second quarter Form 941 for the amount of the exemption with respect to wages paid to Anne from Mar. 19, 2010 through Mar. 31, 2010 and can apply the exemption to wages paid to the qualified employee starting Apr. 1, 2010, despite the fact that Anne did not provide the signed affidavit until Apr. 15, 2010. By contrast, if Anne does not provide the signed affidavit until Aug. 1, 2010, ABX can't claim the first quarter credit on the second quarter Form 941 for wages paid to the qualified employee from Mar. 19, 2010, through Mar. 31, 2010, and can't apply the exemption to wages paid in the second quarter because ABX did not obtain the signed affidavit by the time it filed its second quarter Form 941. Instead, ABX must file a Form 941-X to correct the second quarter of 2010 if it wants to claim the first quarter credit and apply the exemption to the second quarter wages paid to Anne. (FAQ QE17)
Temporary agency employees. A temporary agency can apply the exemption with respect to wages it pays to its qualified employees. This is determined based on when the employee begins employment with the temporary agency, and not based on when the employee begins work at a client business of the temporary agency. (FAQ QE11) If a client business hires an employee who previously provided services to the business as an employee of a temporary agency the client business gets the payroll tax exemption if the worker is a qualified employee when he or she begins employment with the client as its employee. That is, the worker must not have worked as an employee for any business (including the temporary agency) for more than 40 hours in the 60 days prior to beginning employment with the client business. (FAQ QE12)
Election out. Code Sec. 3111(d)(4) provides that a qualified employer may elect, in the manner that IRS requires, not to have the payroll tax exemption apply. IRS says that no formal election out is required; the employer that chooses not to have the payroll tax exemption apply simply reports and pays its share of social security tax on wages paid to qualified employees, along with the employee share of social security tax, Medicare taxes, and withheld income tax. (FAQ PE8)
If an employer applied the payroll tax exemption for a qualified employee on Form 941 for one or more prior quarters, it can later elect out of the exemption by filing Form 941-X for each affected prior quarter to correct its original return and pay the employer's share of social security tax for each such prior quarter. The employer is then eligible to claim the WOTC on its income tax return. (FAQ PE10)
Employer may be selective. An employer can choose to apply the exemption with respect to none, some, or all of its qualified employees. However, if the employer applies the exemption for any wages paid to a particular qualified employee, the exemption must be applied to all wages paid to that employee from Mar. 19, 2010, through Dec. 31, 2010. (FAQ PE 9)
Retention credit and WOTC. An employer may claim the retention credit for a qualified employee (if all the requirements are satisfied) even if it also has claimed the WOTC for the same employee (i.e., even if it has elected out of the payroll tax exemption). (FAQ PE11)
Restaurant employers. Certain food and beverage employers can claim a credit under Code Sec. 45B for social security and Medicare taxes paid or incurred by them on certain employee tips. An employer could be eligible for both the payroll tax exemption and the Code Sec. 45B credit on certain tips if the employer has tipped employees who are also qualified employees under the HIRE Act. The employer claims the payroll exemption on Form 941 and the Code Sec. 45B credit on its income tax return. An employer that applies the payroll tax exemption with respect to a qualified employee will be entitled to a smaller Code Sec. 45B credit because the employer will pay only Medicare tax (and not social security tax) on the employee's wages, including reported tips. (FAQ QR8)
