On March 18, 2010 the Hiring Incentives to Restore Employment (HIRE) Act was enacted. This piece of legislation, also known as the “Jobs Bill”, is designed to encourage the employment and retention of unemployed individuals. There are two components to this bill, the payroll tax exemption and the business credit for retaining newly hired individuals.
The payroll tax exemption is available to taxable businesses and tax-exempt organizations. It exempts the employer from paying the 6.2% employer share of social security tax on all wages paid to a qualified employee for wages paid between 03/19/10 and 12/31/10. This caps at $6,621.60, which is the maximum amount of employer social security tax liability for the current calendar year. The payroll tax exemption credit is claimed on the employer’s quarterly 941, beginning with the second quarter of 2010. Therefore, the credit for wages paid during the 1st quarter of 2010 will be claimed on the 2ndquarter 2010 form 941. Employers will have to indicate on the W-2 the amount of wages covered by payroll tax exemption.
In order to take advantage of this tax credit, the employer must hire a qualified employee. Simply stated, a qualified employee is an individual who has been hired after February 3, 2010 and before January 1, 2011, and was unemployed or worked less than 40 hours in the continuous 60 days prior to the hire date. The qualified employee must complete an affidavit (Form W-11) which, under penalties of perjury, certifies that they meet those specific criteria. The employer should retain this form. If the employer applies the exemption to a non-qualified employee, the employer is liable for the tax on the previously reported exempt wages.
The payroll tax exemption does not apply to individuals hired to replace an existing worker, unless the existing worker terminated employment voluntarily or was terminated for cause. There is no minimum age requirement to be a qualified employee and the hiring of a recent graduate who has been in school during any or all of the 60 day period preceding the hire date is an event that allows the payroll tax exemption. The hiring of an individual to replace someone who was previously laid off because of lack of work, as well as hiring for a new business, is considered a valid form of employment that allow the payroll tax exemption for a qualified employee. In addition, the new hire cannot be a related party (son, daughter (or their descendants), stepson, stepdaughter, brother, sister, stepbrother, stepsister, father, mother (or their ancestors), stepfather, stepmother, nieces, nephews, uncles, aunts, son/daughter in-law, mother/father in-law, brother/sister in-law). The related party exclusion also includes owners (or their relatives) of more than 50% of stock or capital and profits interest in a business and dependents with the same principal place of residence. Interestingly, spouses that do not have an ownership interest in the business, and have not been employed in the 60 days prior to hiring, are not excluded.
The second component of this bill is the credit for retaining newly hired employees. The amount of the credit is the lesser of $1,000.00 or 6.2% of the employee’s wages. Because of this percentage limitation, this credit will max out with wages of $16,129.03. Since there is no restriction for part time workers, it would be better to hire two individuals at $16,129.00 than one worker at $32,258.00. The retained worker must meet the test for the payroll tax exemption. This is available for any employee hired during 2010 after February 3, 2010 that is employed for not less than 52 consecutive weeks. The wages in the last 26 weeks must be at least 80% of the wages in the first 26 weeks. This credit is claimed on the business income tax return. Therefore, calendar year businesses will claim the credit on their 2011 tax returns. Fiscal year businesses will claim the credit over two years. This is a non-refundable credit. Any unused credit must be carried forward (20yr).