New IRS FAQs issued on HIRE Act payroll tax exemption and credit

IRS has issued additional guidance on the 2010 payroll tax exemption for hiring unemployed workers and the tax credit for retaining such workers. These payroll tax breaks were enacted by the Hiring Incentives to Restore Employment Act.  The additional guidance, in the form of frequently asked questions (FAQs), carries valuable information on subjects such as 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 FAQs can be accessed below.  Here are some highlights:

Background. The HIRE Act carried two valuable incentives for employers that boost payroll this year: a payroll (FICA) tax exemption for employers that hire unemployed workers; and an up-to-$1,000 tax credit for keeping such new hires on the payroll for at least one year.

Under Code Sec. 3111(d) , qualified employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to a newly hired qualified individual. The payroll tax relief applies only for wages paid to qualified individuals from Mar. 19, 2010 (the day after the HIRE Act was signed into law by the President) and ending on Dec. 31, 2010.

A qualified employer is any employer other than the U.S., a state, or a political subdivision of a state (i.e., a local government, or an instrumentality). However, a public institution of higher education is a qualified employer even though it is a government instrumentality.

A qualified individual is an individual who:

(1) begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;

(2) certifies by signed affidavit, under penalties of perjury, that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer;

(3) does not replace another employee of the employer (unless that other employee left voluntarily or for cause); and

(4) is not related to the qualified employer in a way that would disqualify the individual for the work opportunity tax credit (WOTC).

Unless the employer elects out of the payroll tax exemption, wages paid or incurred to a qualified individual won't qualify for the WOTC during the one-year period beginning on the date that the qualified employer hired the individual. The election can be made on an employee-by-employee basis.

In addition to the payroll tax exemption, HIRE Act Sec. 103 provides employers with an up-to-$1,000 tax credit for retaining "qualified individuals" as defined for Code Sec. 3111(d) purposes. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their 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.

Following are highlights of IRS's new guidance on these payroll tax breaks.

When payroll tax exemption begins and ends. Code Sec. 3111(d)(1) provides that the requirement to pay the employer share of OASDI tax "shall not apply to wages paid by a qualified employer with respect to employment during the period beginning on [March 19, 2010, the day after the enactment date] and ending on December 31, 2010 ...." if all of the payroll tax exemption requirements are met. IRS says that the payroll tax exemption is based on when wages are paid to a qualified employee, not when the wages are earned by such an employee. Thus, only wages paid from Mar. 19 2010, through Dec. 31, 2010, qualify for the exemption, regardless of when those wages were earned.

Form W-11. IRS recently issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, which newly hired, but formerly unemployed, workers must sign (or its equivalent) in order for their new employers to treat the workers as qualified individuals (see Weekly Alert ¶  1 04/15/2010 ). The Form W-11 need not be notarized and shouldn't be sent to IRS; the employer should keep the form with its records.

Form W-11 may be submitted to the employer electronically, if: the electronic transmission is signed via electronic signature by the employee whose name is on the Form W-11; the signature is made under penalties of perjury using the same language that appears on the paper Form W-11; and the electronic signature is the final entry in the employee's Form W-11 submission. Upon IRS's request during an examination, the employer must supply a hard copy of the electronic Form W-11, and a statement that, to the best of the employer's knowledge, the electronic Form W-11 was made by the employee whose name is on the form. The hard copy of the electronic Form W-11 must provide exactly the same information as, but need not be a facsimile of, the paper Form W-11.

Deadline for receipt of Form W-11. The employer must have the signed Form W-11 (or its equivalent) by the time it files an employment tax return applying the payroll tax exemption. If the signed form is obtained after wages are paid to the employee, the employer can still apply the payroll tax exemption to determine its liability on these wages; it may in some cases have to file a corrected return for a prior quarter.

Illustration: ABX hires Anne, an otherwise qualified employee, who begins employment on Mar. 1, 2010 and is paid wages in March. Anne does not provide the signed affidavit until Apr. 15, 2010. ABX can claim the first quarter credit on the second quarter Form 941 for the amount of the exemption with respect to wages paid to Anne from Mar. 19, 2010 through Mar. 31, 2010 and can apply the exemption to wages paid to the qualified employee starting Apr. 1, 2010, despite the fact that Anne did not provide the signed affidavit until Apr. 15, 2010. By contrast, if Anne does not provide the signed affidavit until Aug. 1, 2010, ABX can't claim the first quarter credit on the second quarter Form 941 for wages paid to the qualified employee from Mar. 19, 2010, through Mar. 31, 2010, and can't apply the exemption to wages paid in the second quarter because ABX did not obtain the signed affidavit by the time it filed its second quarter Form 941. Instead, ABX must file a Form 941-X to correct the second quarter of 2010 if it wants to claim the first quarter credit and apply the exemption to the second quarter wages paid to Anne.