Claim Your Tax Credits

Federal Hire Act of 2010

Blake Christian, CPA, MBT, July 11, 2010 - originally published in the AICPA Corporate Taxation Insider Newsletter.

The 2010 HIRE Act contains two major hiring tax incentives for businesses. Amid concerns of a worsening economy, President Obama signed the HIRE Act into law on March 18, 2010. The law contains two of the most recent hiring tax incentives designed to encourage businesses to increase their levels of employment, reduce the national unemployment rate and help stabilize their budgets. These tax incentives provide immediate economic benefits and are relatively easy to claim, providing business with an added lucrative tax-saving opportunity.

The HIRE Act tax exemption and hiring credit provide a few key items and planning opportunities which encourage businesses to hire new employees and in turn help to reduce the national unemployment rate. The two major incentives provided through the hire act credit 2010 are as follows:

  1. Qualified employers will be exempted from paying the usual 6.2% share of the Social Security payroll tax on certain qualified employees. The exemption is not a complete exemption for all employees or for employees that have been on the staff for years. You’ll remember, that the hire act credit was also signed into law in order to encourage businesses to hire new employees. For that reason, the exemption from the Social Security Payroll tax only applies to new employees for the time period of March 19, 2010, through December 31, 2010.
  2. There is a secondary incentive that allows for a tax credit of up to $1,000 if a business retains a qualified employer on the payroll for at least one year.

The 2010 payroll tax exemption and the 2011 retention tax credit FAQ’s:
There are some stipulations for businesses to utilize either one of the possible exemptions offered through the hire act 2010, and it is important to understand them fully in order to gain the most benefit. On May 13, 2010, the IRS issued additional guidance, in the form of frequently asked questions (FAQ), on the 2010 payroll tax exemption and the 2011 retention tax credit. You can review these FAQs on the IRS website under HIRE Act: Questions and Answers for Employers. These tax incentives were enacted by the "Hiring Incentives to Restore Employment Act of 2010" ( HIRE Act). On May 18th the IRS also released the revised payroll tax form (941) to report the payroll tax exemption with this article.

Eligibility for the Tax Savings:
To determine eligibility some of the specifics of the Federal Hire Act, there are some considerations on the employers and employees that may qualify. These specifics are addressed below.

Determining Employers Eligibility:
A qualified employer is generally any employer in the private-sector, including nonprofit organizations. Public-sector jobs are generally not eligible such as a state or local governments, however, public institutions of higher education are eligible.

So not only does the hire act credit serve to reduce the unemployment and stabilize budgets, it also allows for education to take advantage of the same incentives typical businesses are allowed to. When it comes to qualified employees, it is a bit more specific and detailed.

Employee Eligibility
The Federal Hire Act determines a qualified employee as an individual that begins their employment after February 3, 2010, and is employed before January 1, 2011. The employee who is hired for the business to fall into the categories allowed for in the Federal Hire Act had to either be unemployed, or have worked 40 hours or less for the 60 day period prior to the hiring of the position.

The employee cannot be a replacement for another employee, unless that other employee leaves voluntarily, or for cause (which is generally the case), and cannot be related to the qualified employer under the definitions of the Work Opportunity Tax Credit (WOTC).

There is no minimum weekly number of hours that the new employee must work for the employer to be eligible for the payroll tax exemption, and there is no maximum on the dollar amount of payroll taxes per employer that may be exempt.

Temporary Employees May Qualify
Based on IRS guidelines last month, temporary agencies hiring employees meeting these aforementioned qualification rules can claim the payroll tax exemption, as well as the $1,000 HIRE Act credit if the employment period lasts a year or more. However, the more likely scenario is that the temporary employee works for the temporary agency for a short period and is then hired by a client of the agency. In this case, the temporary agency may claim the payroll exemption for a period of time, then the client company may begin claiming the payroll exemption if at the time the client hires the employee, the new employee has not worked for any business (including the temporary agency) for more than 40 hours during the 60 days prior to being hired by the client. See IRS FAQs QE11 & QE12 .

Additional Qualifications for the Retention Tax Credit
In order to be eligible for the $1,000 tax credit, a qualified individual must remain employed by the qualified employer for no less than 52 consecutive weeks, and the employee’s wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

How to Claim the Payroll Tax Exemption
In order to claim the payroll tax exemption, qualified employees are required to sign an affidavit stating that under penalties of perjury he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins. Form W-11 or any equivalent form that includes the same language as Form W-11, must be signed by a qualified employee by the time the qualified employer files an employment tax return (Form 941). The Form W-11 does not need to be filed with any taxing agency, but is merely a recordkeeping procedure for support of the exemption claimed.

However, due to the timing of the law, there is an exception relating to the first quarter Form 941. An employer may claim the portion of the payroll tax exemption relating to qualifying wages paid during the first calendar quarter of 2010 by applying it against the tax imposed for the second calendar quarter of 2010 and does not need to file an amended employment tax return (Form 941-X). For all other filings, if an employee signs the affidavit after the Form 941 has been filed, a Form 941-X must be filed in order to claim the exemption on wages paid during that period.

How to Calculate the Retention Tax Credit
The credit for retaining qualifying new hires for at least 52 consecutive weeks is 6.2% of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000. Thus, the credit for a retained worker will be $1,000 if the retained worker's wages during the 52-consecutive-week period are at least $16,129. However, the credit is not available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers). The credit cannot be claimed until the 2011 tax year and the IRS has yet to issue the tax forms for this credit.

Additional Requirements and Limitations
The payroll tax exemption is exclusively based on when the wages are paid to a qualified employee and not when the wages are actually earned by that employee. As such, only wages paid from Mar. 19 2010, through Dec. 31, 2010, may qualify for the exemption, regardless of when those wages were actually earned. See IRS FAQ PE7. Unless the employer elects out of the payroll tax exemption, an employer cannot double up on hiring tax credits. That means that for qualified employees that would otherwise qualify for WOTC, an employer must select one benefit or the other. Yet, an employer may still claim the retention credit for a qualified employee even though it has claimed the WOTC credit on that employee. See IRS FAQ PE11.

How to Elect Out of the Payroll Tax Exemption
Employers may not want to apply the HIRE ACT payroll tax exemption to certain employees who otherwise qualify for the WOTC since the WOTC credit is 25% to 50% on up to $10,000 of wages vs. 6.25% of the FICA wages under the HIRE Act payroll tax exemption.. The employer can choose to apply the tax exemption to all, some, or none of their HIRE Act qualified employees. An employer can "elect-out," if it chooses not to have the payroll tax exemption apply. This is done simply by filing the Form 941 and paying the employer portion of the social security tax on wages, just as it has done in the past. In addition, employers who have applied the payroll tax exemption can later elect out of the exemption by filing a Form 941-X and pay the employer’s share of the social security tax for each prior quarter. See IRS FAQs PE8 & PE9.

Benefits Many
When President Obama signed the Federal Hire Act, it was meant to not only stimulate employment, but it was also intended to help businesses to stabilize their budgets. An additional key piece is that it allows for institutions of higher education to benefit as well. Helping education is still at the forefront of a new law intended to help the American economy, and the American people move forward.

For more detailed information about the Federal Hire Act 2010 refer to the IRS website for any additional questions. You can access their website.

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