On March 18, 2010, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act into law. The HIRE Act was designed to encourage employers to hire and retain new workers. Specifically, the HIRE Act created two new tax benefits that will encourage employers to hire new employees, while offsetting some of the payroll costs associated with new employees.
Employers who hire unemployed or underemployed employees between February 3, 2010, and January 1, 2011, may qualify for a 6.2 percent payroll tax incentive. Typically, employers are required to pay an employer share of Social Security tax and withhold an employee share of Social Security tax as well. The HIRE Act will exempt employers from paying their 6.2 percent share of Social Security tax on wages paid to eligible workers from March 19, 2010, through December 31, 2010. Employers will still need to withhold Medicare taxes and the employee's 6.2 percent share of Social Security taxes.
In addition to the payroll tax exemption, for each new worker retained for at least 52 consecutive weeks, the employer may claim a general business tax credit. The credit will be 6.2 percent of wages paid to a qualifying employee during the 52 week retention period, up to a maximum $1,000 per qualified worker. The credit will be claimed when employers file 2011 federal income tax returns. Although the credit is not retroactive, it can be carried forward, which will be important since the 52 week retention period will not end for many employers before they file their 2011 returns.
Who is qualified?
Most, but not all, employers are eligible under the HIRE Act to receive both the payroll tax exemption and the retention tax credit. For example, all for-profit businesses, agricultural employers, tax-exempt organizations, and public colleges and universities are eligible. Federal, state and local government entities, as well as household employers, are not eligible.
The Act is designed to stimulate hiring of persons who do not have jobs or steady work. As a result, employers may only reap the HIRE Act tax incentives for new hires that have been unemployed for, or who worked less that a total of 40 hours during, the 60-day period prior to commencing employment. Almost anyone qualifies under the HIRE Act except: (1) family members, (2) employees that are hired to replace another employee, or (3) employees whose work is not in an employer's specific trade or business.
Employers cannot "churn" the payroll to take advantage of HIRE Act benefits. As a result, the tax incentives will not apply to new hires who are replacing an existing worker unless the position remained unfilled for at least 60 days or the original employee voluntarily quit or was terminated for legitimate cause. Small business owners will also not be able to get tax incentives for hiring family members or relatives.
The HIRE Act requires that qualified employers get a statement from each eligible new hire, certifying under penalty of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. To that end, the Internal Revenue Service has published Form W-11, entitled "Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit." Form W-11 is currently posted on the IRS website (www.irs.gov) and can be used by employers to meet the affidavit requirement. IRS has also posted HIRE Act FAQs for employers on its website.
Employers claiming HIRE Act benefits do not need to file W-11 forms but must retain them with other payroll records. The payroll tax exemption will be claimed on the newly-revised Form 941, Employer's Quarterly Federal Tax Return, beginning April 1, 2010. If the employer qualifies for the payroll tax exemption for wages paid to a qualifying new hire between March 19 and March 31, the employer can also claim that on the Form 941 for the second quarter.