The IRS has issued additional guidance in the form of frequently asked questions (FAQs) on the 2010 payroll tax exemption for hiring unemployed workers and the tax credit for retaining such workers. These incentives were enacted as part of the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act). The FAQs address many subjects, including 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.
The HIRE Act includes two incentives for employers that hire unemployed workers in 2010; a payroll tax exemption for employers that hire these workers and a tax credit for keeping them employed for at least a year. Under the HIRE Act, qualified employers are exempted from paying the employer’s 6.2 percent share of Social Security (OASDI) employment taxes. The tax holiday applies to wages paid to qualified individuals from March 19, 2010 to Dec. 31, 2010. Unless the employer elects out of the exemption, wages paid or incurred won't qualify for the Work Opportunity Tax Credit (WOTC) during the one-year period beginning on the date that the qualified employer hired the individual. In addition to the payroll tax exemption, the HIRE Act also provides employers tax credit for retaining “qualified individuals” for a year.
FAQs
The FAQs address a number of issues, including:
1. When payroll tax exemption begins and ends. Under the HIRE Act, an employer’s requirement to pay its share of OASDI “shall not apply to wages paid by a qualified employer with respect to employment during the period beginning on March 19, 2010, and ending on Dec. 31, 2010” if all of the payroll tax exemption requirements are met. PE7 clarifies that the exemption is based on when wages are paid and not when they are earned.
2. Form W-11. The IRS recently issued Form W-11, the HIRE Act Employee Affidavit, which newly hired workers must sign and employers must keep in order to be eligible for the incentives. QE14 and 15 clarify that the Form W-11 doesn’t have to be notarized and should not be sent to IRS. QE18 states that the form W-11 may be submitted to the employer electronically. Upon examination, the employer must provide the IRS with a hard copy of the electronic form, which must provide exactly the same information as, but need not be a facsimile of, the paper Form W-11.
3. Deadline for receipt of Form W-11. QE17 provides that the employer must have the signed Form W-11 by the time filing an employment tax return. If the signed form is obtained after wages are paid, the employer can still apply the payroll tax exemption to determine its liability.
4. Temporary agency employees. QE11 states that a temporary agency can apply the exemption to wages for qualified employees based on when the employee begins employment with the temporary agency. QE12 clarifies that if a client of the agency hires a worker, that 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 in order to receive the exemption.
5. Election out. PE8 provides that no formal election is required to forego the exemption; rather, the employer must report and pay its normal share of social security tax on wages paid to qualified employees. However, under PE10, if an employer applied the exemption on Form 941 for one or more prior quarters, it can later elect out of the exemption by filing Form 941-X.
6. Employer may choose different treatments for different employees. Under PE9, 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 March 19, 2010, through Dec. 31, 2010.
7. Retention credit and WOTC. Under PE11, an employer may claim the retention credit for a qualified employee, but not the payroll tax exemption, even if it also has claimed the WOTC for the same employee.
The FAQs, which can be viewed on the IRS website using the included links, are organized as follows:
“FAQs About the Payroll Tax Exemption and Qualified Employers,” are organized as QR 1 through 8