Complete Tax

By Robert Steere, Toolkit Staff Writer

Has your business finally begun the turn-around after a tough time in survival mode during the Great Recession? Can you begin to hire new employees? If so, you can now begin taking advantage of a new federal tax break for employers who hire certain types of workers.

The Internal Revenue Service (IRS) has released a new payroll tax form (a revised version of Form 941, Employer's QUARTERLY Federal Tax Return) that most eligible employers can use to claim the special payroll tax exemption that applies to many new workers hired during 2010.

Designed to encourage employers to hire and retain new workers from the ranks of the unemployed, the payroll tax exemption for 2010 and the related "new hire retention" credit for 2011 were created by the Hiring Incentives to Restore Employment (HIRE) Act, enacted earlier this year.

The Payroll Tax Exemption. Under the HIRE Act, during the period from February 3 through the end of the year, if an employer hires individuals who were unemployed for 60 days or more leading up to the hiring date, then the employer may qualify for an exemption from the 6.2 percent employer's share of Social Security tax on the wages paid to these workers during the period from March 18 through the end of the year.

The reduced payment of the employer's share of Social Security tax will not affect the employee's future Social Security benefits. The employer is still responsible for paying the employer's 1.45 percent share of Medicare tax and for withholding and paying the employee's 6.2 percent share of Social Security tax and 1.45 percent share of Medicare tax on all wages in accordance with the regular requirements.

Claiming the Payroll Tax Exemption. Most employers claiming the payroll tax exemption for wages paid to qualified new hires will use the new version of Form 941, Employer's QUARTERLY Federal Tax Return—revised for use beginning with the second calendar quarter of 2010. The HIRE Act did not allow employers to claim the exemption for wages reported on the Form 941 filed for the first quarter of 2010, but provides for a credit in the second quarter for wages paid from March 19 through March 31 of the first quarter. The instructions for the new Form 941 explain how this credit can be claimed on the second-quarter return. The form and instructions are now available for download on the IRS website.

The Employee Certification Form. The HIRE Act also requires an employer to obtain a signed statement from each eligible new hire, certifying under penalties of perjury, that he or she was not employed for more than 40 hours during the 60 days before beginning employment with that employer. Employers can use new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, released last month, to meet this requirement. Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records.

The "New Hire Retention" Tax Credit. In addition to the payroll tax exemption for 2010, businesses may claim a "new hire retention" credit in 2011 of up to $1,000 per qualified worker retained for at least one full year. This credit will be claimed on the employer's income tax return for the 2011 tax year. Further details on both the tax credit and the payroll tax exemption can be found in a recently expanded list of answers to frequently asked questions about the new law now posted on the IRS website.

These two tax benefits are especially helpful to employers who are adding positions to their payrolls rather than merely replacing existing positions. However, new hires who otherwise qualify for the tax breaks will still qualify when hired to fill existing positions as long as they are replacing workers who left employment voluntarily or were terminated for cause. An employer cannot take these tax breaks when hiring family members or others who are closely related.

Businesses, agricultural employers and tax-exempt organizations all qualify to claim the payroll tax exemption for eligible new hires. Household employers, however, are not eligible.

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