by Marie Jett, CPA | Manager Tax Services
Earlier this year, the President signed into law the 2010 HIRE Act. The act was created to try and provide employers tax incentives to hire employees. Two new laws created from this act are the payroll tax holiday and the retained worker tax credit. Effective for tax years ending after March 18, 2010, employers have been given a payroll tax holiday on the 6.2% OASDI portion of the employer’s share of Social Security Tax for the remainder of 2010 and a retained worker tax credit of up to $1,000 per retained employee.
For employers to be eligible for both the payroll tax holiday and retained worker credit, the following guidelines must be met. First, the employer must be a qualified employer, which is a private sector, a non-profit, or a public institution of higher education employer. Second, the employer must hire a qualified employee. A qualified employee is one that has been unemployed in the 60 days prior the start date. In addition, the employee is required to sign a statement, under penalty of perjury, that he/she has not been employed for more than 40 hours during that 60 day period. An employee that replaces another employee who performed the same job is not eligible for the benefits, unless the prior employee left the job voluntarily or for cause. Family members are also not eligible for the tax holiday or credit.
If an employer hired a qualified employee after February 3, 2010, that employee is eligible for the payroll tax holiday and the retained worker credit. However, only wages paid after March 18th will apply to the calculation of the payroll tax and retained worker credit. For example, if company XYZ hires a qualified employee on February 22, 2010, the employee will qualify for the payroll tax holiday, but only the wages earned after March 18th will quality for the 6.2% payroll tax holiday. Due to the short amount of time between March 18th and the end of the first quarter, for employees hired in the first quarter, the employer 6.2% OASDI holiday did not apply. To claim the first quarter payroll tax holiday, the amount calculated from the first quarter will be applied to the second quarter. Form 941, which is used to claim the payroll tax holiday wages, has been revised by the IRS to include all of the payroll tax holiday changes. There are separate lines to report wages earned in the second quarter that are eligible for tax holiday and another separate line to report the applicable first quarter wages (March 18 – 31) that were eligible for the tax holiday.
An employer can choose to not take part in the payroll tax holiday. If an employer hires an employee that qualifies for the Work Opportunity Tax Credit (WOTC), the employer has the option to choose between the tax holiday and the WOTC – the employer is not allowed to use both. The decision can be made on an employee by employee basis. WOTC may be more beneficial to employers if they hire low-wage employees or hire an employee late in 2010. WOTC is harder to qualify for as the employee must be certified by a state agency as a member of a targeted group. If the employer chooses to use the WOTC for the employee instead of the payroll tax holiday, the employer can still claim the retained worker credit, assuming specific requirements are met.
The retained worker credit has a couple of additional requirements that must be met in order for an employer to qualify. First, the employer must keep the employee for 52 continuous weeks. Second, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. The employee can be full-time or part-time, but must meet these additional requirements. The credit is calculated as the lesser of $1,000 or 6.2% of wages paid during the consecutive 52 week period. If the employee’s wage for the 52-week period is more than $16,129.03, the maximum credit allowed for that employee is $1,000. The credit is claimed on the employer’s business tax return and is taken once the 52-week requirement is met, which for a calendar year taxpayer will be the 2011 tax return. Compensation that isn’t subject to income tax withholding, such as certain fringe benefits, or wages for employees that are exempt from income tax withholding won’t quality as wages for the purposes of calculating the credit. The credit is nonrefundable, but can be carried forward to future years. Additionally, the general business credit limitations will apply. For example, the credit will not be allowed to offset alternative minimum tax (AMT).
If you are eligible to claim the payroll tax holiday or the retained worker credit, we recommend that you keep careful records on the employees hired and make sure you have proper documentation to prove the employee meets the requirements of a qualified employee. If you have any questions on whether you can use these beneficial tax savings for your company, please don’t hesitate to call us at 317-241-2999.