New Law Offers Employer Payroll Tax Break

Tuesday, March 23, 2010

On Thursday, March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act (HIRE Act) into law.

The bill, estimated to cost about $18 billion, had bounced back and forth between the House and Senate during the past month. Often referred to as a job stimulus bill, the HIRE Act provides a payroll tax exemption to employers who hire unemployed workers after February 3, 2010, through the end of 2010. The tax break applies to wages paid with respect to employment on the day after the HIRE Act becomes law through the end of 2010. Also in the HIRE Act, a new hire retention credit of up to $1,000 per individual is available for employers who retain these previously unemployed workers for at least 52 weeks in a row.

Payroll Tax Exemption (Section 101)

Section 101 of the HIRE Act provides details on the payroll tax exemption. Under these provisions, most employers do not have to pay their portion of Social Security taxes (6.2 percent) for newly hired, unemployed individuals, who are called “qualified individuals.” With one exception, this payroll tax exemption is not available to U.S. and state governments, or any of their political subdivisions (e.g., city or county governments). The exception is that the tax break is available to public institutions of higher education (as defined in §101(b) of the Higher Education Act of 1965). Thus, the payroll tax exemption is available to for-profit and non-profit employers of any size, and public colleges and universities.

The requirements for Qualified Individual under the HIRE Act are as follows:

·        The individual began employment with the qualified employer after February 3, 2010 (i.e., February 4, 2010), and before January 1, 2011 (i.e., December 31, 2010).

·        The individual was employed for no more than 40 hours during the 60-day period ending on the date that the individual was hired by the qualified employer. This requirement must be certified by an affidavit signed by each qualified individual, under penalties of perjury. The IRS has indicated that it will soon provide a sample affidavit on its website:  www.irs.gov.

·       The individual was not employed by the qualified employer to replace another employee unless the other employee resigned voluntarily or was terminated for cause. The IRS clarified that cause means more than gross misconduct. Based on a previous Technical Explanation, the IRS views cause broadly to include “other facts and circumstances” that caused the termination. Cause would exclude firing someone in order to claim the payroll tax exemption.

·        The individual does not bear any of the following relationships to any 50 percent or more owner (as defined by §51(i)(1) of the Internal Revenue Code) of the qualified employer:

o   A child or a descendant of a child

o   A brother, sister, stepbrother or stepsister

o   The father or mother, or an ancestor of either

o   A stepfather or stepmother

o   A son or daughter of a brother or sister of the taxpayer

o   A brother or sister of the father or mother of the taxpayer

o   A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law

o   An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to §7703 of the Code, of the owner) who, for the taxable year, has the same principal place of abode as the owner and is a member of the owner’s household

The IRS recently clarified several important aspects of the payroll tax exemption. First, the law applies to “wages paid by a qualified employer with respect to employment during the period beginning on the day after the date of enactment … and ending on December 31, 2010.” The IRS interprets this to mean any wages paid on or after March 19, 2010, regardless of when the wages were earned.

Second, the IRS has provided Infinisource and others a preview of changes to the Form 941, the quarterly tax report. The first quarter Form 941, due at the end of April, will not contain any payroll tax exemption information. Instead, any exemption amount due the employer for the March 19-31, 2010, period can be allocated one of two ways:

·         A reduction of payroll tax deposits in the second quarter, or

·         Reflection on the second quarter Form 941on new lines 12c and 12d.

The second quarter Form 941 will have new lines 6a through 6e. The good news for employers is that the Form 941 will not require any itemized attachment. However, as always, employers will need to maintain appropriate documentation in case of an audit.

Third, a few employers may want to opt out of this tax break for tax-related reasons. Accordingly, the HIRE Act allows employers to do this although it is unclear what the process will be. The law instructs the Secretary of Treasury to provide guidance.

Employers of all sizes qualify for the payroll tax break. It applies to part-time and seasonal employees, regardless of exempt/non-exempt status or hourly/salaried payment method. Rehires would be included as well. If an employer receives the Work Opportunity Credit for a qualified individual, the employer is not eligible for the tax break under the HIRE Act.

New Hire Retention Credit (Section 102)

Under Section 102 of the HIRE Act, if the qualified individual is retained by the employer for 52 consecutive weeks, the employer is entitled to a new hire retention credit of up to $1,000 per individual. The credit is equal to the lesser of 6.2 percent of wages or $1,000. In other words, if wages are at least $16,129.03, then the new hire retention credit is $1,000. Otherwise, it is 6.2 percent of wages. During the last 26 weeks of that period, the qualified individual must have wages that are at least 80 percent of the wages for the first 26 weeks.

The individual must have been hired during the February 4-December 31, 2010, time period. This credit is not available to domestic workers and employees who can claim the foreign earned income housing exclusion. An employer can take both the payroll tax exemption and the new hire retention credit on the same employee.

Infinisource Actions

On behalf of our many payroll clients and service bureaus, Infinisource has already been working on updates to our comprehensive payroll and tax administrative services. We have developed a sample affidavit to confirm qualified individual status. This affidavit will soon be put into production for use by Infinisource payroll clients. Infinisource has also developed a process for employers to report qualified individuals. More detailed information will be forthcoming shortly.

More information is available on our websites: www.infinisourcepayroll.com and www.infinisource.net.