New tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enabled March 18, 2010.

Employers who hire unemployed workers this year (after February 3, 2010 and before January 1, 2011) may qualify for a 6.2% payroll tax incentive, in effect exempting the employer from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax payment will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2% share of Social Security taxes as well as income taxes. The employer and employee’s shares of Medicare taxes would still apply to these wages.

In addition, for each worker retained for at least a year, businesses may claim a new hire retention tax credit up to $1,000 per worker when they file their 2011 income tax returns.

Qualified Employer:

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Qualified Employee:

Qualified employees are individuals who begin employment with a qualified employer after February 3, 2010 and before January 1, 2011, who have been unemployed or employed for less than 40 hours during the last 60-day period and who are not family members of or related in certain other ways to the employer.

The new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or worked fewer than a total of 40 hours for someone else during the 60 day period. Form W-11 (enclosed) can be used for this purpose.

How it works:

The IRS is revising the payroll tax forms to reflect the change in the law. The employer will claim the employment tax benefit on the revised Form 941 or other employment form. There is no direct reduction in the employer’s share of FICA for the first quarter because the revised forms were not available. The first quarter amount will be applied to the amount due for the second quarter. At year-end, the employer will also report the Social Security tax exempt wages on the W-2 in Box 12 using the new Code CC.

Two cautions:

1. The employee can’t replace another employee unless that employee was fired for cause or quit and that the hired employee can’t be related to the employer.
2. The employer can’t claim both the new hire tax retention credit and the work opportunity credit on the same employee; however, the employer may still be eligible for the 6.2% payroll tax incentive.

If you have any questions regarding the new hiring incentives, please give our office a call.

As always, thank you for allowing MizickMiller to serve as your accounting and financial information professionals.