On March 18, 2010, the president signed the HIRE Act into law. The cornerstone of the HIRE Act is a federal program that provides employers with incentives to hire and retain employees. There are two key provisions that provide these incentives:
Social Security Tax Forgiveness - this means an employer is exempt from paying the employer portion of Social Security taxes for the remainder of the year on new hires who are currently unemployed.
Business Tax Credit for Retention - if those workers stay on the payroll for at least a year, the employer would also get up to a $1,000 business tax credit per employee.
Each provision has its own conditions surrounding these credits.
The 6.2% employer portion of the Social Security tax is exempt for any qualified individual hired after February 3, 2010 but before January 1, 2011. This exemption can be taken for wages paid on March 19, 2010 through December 31, 2010 up to the $106,800 Social Security wage base.
With the Social Security Forgiveness provision, an employer can save up to $6,622 in employer Social Security tax for each qualified hire. There is no limit to the total number of hires during this period, so employers will receive greater tax benefits by hiring individuals earlier in the year.
Qualified Employers
- An employer must be in a trade or business, providing some form of good or service.
- Tax-exempt and non-profit organizations qualify for the payroll exemption. A church qualifies as long as it withholds and pays Social Security taxes on behalf of its employees.
- Employers in the U.S. and District of Columbia, as well as all U.S. territories and possessions, such as Puerto Rico or the U.S. Virgin Islands, that is subject to Social Security tax.
- Federal, state, or local government employers do not qualify for the payroll tax exemption; however, public colleges and universities can qualify.
- Household employers do not qualify.
A qualified employer is not required to take any tax credits associated with this provision.
Qualified Individual
A "qualified" individual must meet all of the following requirements:
- Begins employment with a qualified employer after February 3, 2010, but before January 1, 2011.
- Has not been employed for more than a total of 40 hours during the previous 60 days, including weekends, and the previous 60 day period must be continuous
The employee can be hired into a new position, or the employee may replace another employee, but only if the other employee separated from employment voluntarily or for cause.*
*"For cause" could mean situations such as downsizing or performance issues. Employers should consult with an attorney or employment law expert about their specific employment policies regarding "for cause" reasons.
Is not a family member of the business owner.
Note: An employee is considered related to the employer if he or she is:
- A child or a descendent of their child,
- A sibling or stepsibling,
- A parent or an ancestor of their parent, their stepparent, their niece or nephew, their aunt or uncle, or their in-law.
An employee also is related if he or she is related to anyone who owns more than 50 percent of their outstanding stock or capital and profits interest or is their dependent or a dependent of anyone who owns more than 50 percent of their outstanding stock or capital and profits interest.
A spouse may qualify but it depends on the percentage of ownership that the spouse who is hiring has in the business. We recommend consulting with your CPA or tax advisor if you have a question of whether a particular spouse would qualify.
- Is not a household or government employee.
Is required to attest by signed affidavit, or similar statement under penalties of perjury, that he or she has not been employed for more than a total of 40 hours during the 60-day period ending on the date the employee begins employment with the employer. The IRS created a new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit and is used to confirm that an employee is qualified under the HIRE Act.
Note: This credit will have no impact on the qualified individual's Social Security benefits. The Federal Treasury will transfer funds to make the Social Security account whole so there is no detriment to the employee hired under the Act.
Interaction with the Work Opportunity Tax Credit (WOTC)
The Social Security tax exemption can not be taken in conjunction with the Work Opportunity Tax Credit (WOTC). WOTC provides a tax credit to employers who hire workers from certain "targeted groups." In other words, if the employer chooses to take the WOTC on a qualified worker, they cannot also take the Social Security tax exemption.
If a new hire is a qualified individual for purposes of the Social Security tax exemption under the HIRE Act and is also WOTC eligible, the employer must choose between the Social Security tax exemption and the WOTC. Employers should evaluate the credit potential of both options before making a determination on which credit is the best fit. Not all individuals that qualify for WOTC may qualify for the employer Social Security tax credit.
Keep in mind the Social Security tax exemption is only good for wages paid through the end of 2010 year while WOTC includes the first full year of employment. For workers that would otherwise be eligible for the WOTC, the employer must select one benefit or the other for 2010 — there is no double dipping.
If the employer begins to take the reduced Social Security tax for a qualified employee, then the wages paid to that individual cannot be taken into account for the WOTC. However, the employer can choose to pay back the reduced Social Security tax for a "qualified individual," and file a form 941-X in order to be able to instead claim the WOTC on a qualified employee.
Form W-11, Employee Affidavit
Form W-11, HIRE Act Employee Affidavit is used to confirm that an employee is "qualified" under the HIRE Act. This form is completed and signed by the employee — and then submitted to the employer. The employer does not need to obtain any proof that what the employee attested to is true. If it turns out that it was false, the tax credit would need to be paid back to the IRS.
Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file Form W-11 with the IRS. Instead, they must retain it along with other payroll and income tax records.
Employers do not need to use the official IRS version; they can create their own, as long as the employer version has wording identical to the IRS version.
The Form W-11 must be signed and received by the employer by the due date of the Form 941 that the credits are being claimed on.
How to Take the Social Security Forgiveness Credit
There are two ways in which an employer can apply the Social Security tax exemption:
- Claim the Social Security tax amount as an overpayment on the Form 941 at the end of the quarter.
- Take the Social Security tax exemption on a rolling basis as a reduction in federal tax liability. In other words, an employer can reduce his federal deposit amounts throughout the quarter by the amount of the employer Social Security so they do not need to wait to claim the credit on the quarterly 941 return.
In simpler terms, an employer reduces his tax liability and deposit each payroll period, or he can apply the lump sum amount quarterly as an overpayment on Form 941.
Qualified employers may begin claiming the HIRE Act tax credit on the second quarter 2010 Form 941.
First quarter qualified exempt wages paid on March 19 – March 31 will be reported and the tax credit applied on the second quarter Form 941 return as a separate line item. If the due date for claiming the first quarter credits has passed, the credits will have to be claimed through Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
Additional Reporting and Form Modifications
The IRS is modifying various forms to account for reporting of HIRE Act exempt wages and credits as follows:
- The final version of Form 941 for second quarter is now available on the IRS Website. This includes reporting exempt wages and the number of qualified employees for both first and second quarter separately.
- Schedule B is also impacted. Starting with the second quarter, the federal liability and deposit amounts are reduced by the employer Social Security portion. This is the case regardless if the employer is reducing federal tax liability and deposits per payroll or taking the amount as a lump sum quarterly.
- Form modifications are also necessary for Forms 944 and 943 and should closely mirror those made to Form 941.
- The IRS has determined that the exempt wages for a qualified employee will be reported on the W-2 form in box 12 and labeled with a new code "CC." Both forms W-2 and W-3 have been modified.
This provision allows for a one time additional business tax credit to encourage the retention of qualified new hires under the HIRE Act.
The employer can claim a credit for each qualified employee for the Social Security payroll tax exemption who remains an employee for 52 consecutive weeks, provided that the employee's pay does not decrease significantly in the second half of the year.
In order to be eligible, the employee's pay in the second 26-week period must be at least 80 percent of the pay in the first 26-week period. The amount of the credit allowed is the lesser of $1,000 or 6.2 percent of federal income taxable wages paid by the employer to the retained qualified employee during the 52 consecutive week period.
Since the employee's start date must be after February 3, but before January 1, 2011, the employee's wages will span over 2010 and 2011. This credit will be claimed on the employer's 2011 business tax return. If the full credit can not be taken in 2011, the credit can be carried to future years but can not be carried back to previous years.
The interaction with the Work Opportunity Tax Credit (WOTC) and the HIRE Act Business Retention Credit does allow an employer to take both credits on a qualified individual. Therefore, if a new hire is a qualified individual for purposes of the business credit under the HIRE Act and is also WOTC eligible, the employer can apply both credits to the same employee.
