Payroll Tax Incentives Available for Employers Expanding Workforces

May 28, 2010

Overview

The Hiring Incentives to Restore Employment (HIRE) Act – signed into law on March 18, 2010 – contains valuable tax incentives for any employer planning to expand its workforce this year. Under this law an employer can get partial relief from its 2010 Social Security tax liability by hiring currently unemployed workers. The tax benefit will vary depending on the total wages paid to these workers, but could be as high as $6,621.60 per worker. If an employer retains one or more of these new workers for at least one year, the employer will be entitled to an additional tax credit of up to $1,000 per worker.

Social Security Tax Holiday

The Social Security tax holiday is available to employers of every size and industry, including non-profit agencies. Government and household employers are not eligible. If an employer hires one or more qualifying individuals this year, the employer will be exempt from the employer's portion of the Social Security tax on certain wages paid to these workers in 2010. 

An employer can only claim a Social Security tax exemption for a worker who meets the following HIRE Act requirements:

The Social Security tax exemption applies to wages paid to qualifying individuals for work performed from March 19, 2010 through December 31, 2010.  These wages are exempt from the employer's portion of the Social Security tax, which is imposed at a rate of 6.2%.  The employer must still pay its share of the Medicare tax on these wages (at a rate of 1.45%), as well as withhold and deposit the full amount of the employee's share of each tax (at a combined rate of 7.65% -- 6.2% + 1.45% -- on the first $106,800 in wages paid to the employee).

Coordination with Work Opportunity Credit

The tax abatement created under the HIRE Act cannot be combined with the Work Opportunity Credit. The Work Opportunity Credit, available to employers who hire workers from certain disadvantaged groups, has more stringent requirements. But, if the employer qualifies, the Work Opportunity Credit may provide a greater tax benefit – particularly if the employer hires workers late in the year or in low-wage positions. Before taking advantage of the Social Security tax abatement, an employer should determine if a Work Opportunity Credit makes more sense. 

If an employer chooses to claim a Work Opportunity Credit, it must file an election with the IRS. Otherwise, the IRS will automatically apply the FICA tax abatement rather than the Work Opportunity Credit. An employer can make separate elections on an employee-by-employee basis.

Additional Business Credit for Retaining Employees

The HIRE Act includes an incentive to encourage employers to retain qualifying workers after the Social Security tax holiday has expired. If an employer retains one or more qualifying workers for at least 52 consecutive weeks, the employer will be eligible for an additional general tax credit (not a payroll tax credit). For each qualifying employee, the credit will be $1,000 or 6.2% of the wages paid to the employee in the employee's first year, whichever is less. 

An employer can only claim this additional credit for an employee if the employee's wages during the last half of the employee's first year equal or exceed 80% of the employee's wages paid during the first half of the employee's first year. With respect to each employee, the credit must be taken in the year that the employer first becomes eligible. So for calendar-year taxpayers, the credit for each qualifying employee will apply against the employer's 2011 income tax liability. Other limitations may apply.

New W-11 and 941 Forms Issued by IRS

The IRS has issued a form W-11 to be used as the Affidavit for employees to certify they have not worked more than 40 hours in the last 60 days.  The updated Form 941 contains line items for claiming the credit. Both forms can be obtained on IRS.gov. 

If you have questions or would like additional information regarding this Legal Update, please contact Alison Stemler or any other attorney in Frost Brown Todd's Tax Law or Employee Benefits Service Areas.

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