The Hiring Initiatives to Restore Employment (HIRE) Act, signed into law on March 18, 2010, includes two incentives that may provide significant tax savings for qualifying organizations that hire new employees. These incentives include a payroll tax exemption and a credit worth up to $1,000 for retaining such employees. Because a large part of the incentive is tied to payroll taxes, the legislation can immediately enhance employers’ cash flow by permitting employers to retain their portion of the Social Security tax ordinarily remitted to the IRS.
Qualifying employees include individuals hired between February 3, 2010, and December 31, 2010, who have not worked more than 40 hours within the 60 days prior to being hired. The payroll tax exemption has no cap or limit on the total amount of tax benefits that can be claimed by an employer. Employers can save up to $6,622 per qualifying employee, whether they hire one new employee or hundreds of new employees. In addition to the current payroll tax exemption, employers may also receive an income tax credit of up to $1,000 for each qualifying employee who is retained for at least 52 consecutive weeks after being hired.
The tax benefits are available to a broad range of businesses, including agricultural employers, tax-exempt organizations, tribal governments, and public colleges and universities. Taxpayers that historically claimed the Work Opportunity Tax Credit (WOTC) have generally adapted the HIRE Act requirements to their existing hiring procedures. However, the HIRE Act incentives have the potential for a greater positive impact on employers since they apply to a broader base of potential new employees. Despite the broad application of the rules and fairly limited reporting requirements, the legislation has received a lukewarm reception from many potentially eligible employers.
This edition of Tax Advisor Weekly addresses common reactions from taxpayers considering these incentives.
1. We have let employees go this year, so I’m not entitled to the tax benefits.
The payroll tax exemption does not apply to wages paid to an employee who is hired to replace an existing employee, unless the existing employee terminated employment voluntarily or was terminated for cause. The instructions to Form W-11 clarify that employees dismissed for cause will not impact entitlement to the incentive. The term “for cause” is not specifically defined.
The instructions for IRS Form W-11 provide that “cause” may include downsizing. Therefore, taxpayers who have laid off employees may still be eligible for these important incentives. Other reasons an employee could be terminated for cause include, but are not limited to, stealing, lying, failing a drug or alcohol test, falsifying records, embezzlement, insubordination, deliberately violating company policy or rules, and other serious misconduct related to their employment. These serious acts of misconduct are often cited when an employer is not required to pay unemployment benefits.
The IRS clarified in guidance released last week that the payroll tax exemption applies to wages paid to an employee hired to replace an individual whose employment was terminated due to poor performance. Other common actions that may result in firing for cause, but that do not constitute misconduct, include poor performance due to lack of skills, good faith errors in judgment, attendance problems and poor relations with coworkers.
2. I don’t think I hire qualifying employees.
The payroll tax exemption applies to wages paid to any qualified employee. Unlike the WOTC, the HIRE Act incentives are not limited to certain classes of individuals or employees. Employers can avoid paying the 6.2 percent employer Social Security tax under the HIRE Act, whether they hire an employee who earns $30,000 or one who earns $100,000 annually. The employee’s 6.2 percent share of Social Security tax and the employer's and employee’s shares of Medicare tax still apply to all wages.
If an employer hires a recent graduate who has been in school for some or all of the 60 days preceding the date of hire, the payroll tax exemption also applies to wages paid to that employee. It is not necessary that an individual was previously employed and has lost his or her job in order to be a qualified employee under the HIRE Act.
The IRS also recently clarified that a self-employed individual may be a “qualified employee” because only work performed as an employee counts in determining whether an individual has been employed for 40 hours or less during the 60-day period.
3. I have NOLs so I can’t focus on these types of opportunities.
Because a significant portion of the HIRE Act incentives relate to payroll taxes, even employers who are not currently paying income tax can benefit from these incentives.
4. The documentation requirements are too stringent.
There is no requirement that employers send signed employee affidavits, such as Form W-11, to the IRS. However, employers should retain these affidavits with other payroll and income tax records. A qualified employee must certify "by signed affidavit," under penalties of perjury, that he or she has "not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment." Qualified employees will be able to fill out W-11 forms online, print them, sign them and submit them to their employer.
Employers must secure the signed affidavit by the time the employer files an employment tax return applying the payroll tax exemption. If the employer obtains the signed affidavit from a qualified employee after wages are paid to the employee, the employer can still apply the payroll tax exemption in order to determine its liability on these wages. In some cases, this may require the filing of a corrected return for a prior quarter.
5. If I forget to claim qualified employees on my second-quarter payroll tax filing, can I still qualify for the payroll tax exemption?
Yes, employers may amend their quarterly payroll tax filings. As a matter of fact, taxpayers should not be claiming the exemption if they don’t have Form W-11 documentation in place at the time of the filing.
In contrast, if the otherwise qualified employee does not provide the signed affidavit until August 1, 2010, employers may not claim the first-quarter credit on the second-quarter Form 941 for wages paid to the qualified employee from March 19, 2010, through March 31, 2010, and cannot apply the exemption to wages paid in the second quarter because the employer did not obtain the signed affidavit by the time it filed its second-quarter Form 941. Instead, employers must file a Form 941-X to correct the second quarter of 2010, if they want to claim the first-quarter credit and apply the exemption to the second-quarter wages paid to the qualified employee.
6. What if I let employees go in one location, but I need to hire them in another?
Employers may apply the payroll tax exemption to wages paid to a rehired employee who is otherwise a qualified employee. However, the HIRE Act’s 60-day period for evaluating hours worked before being hired must be continuous. The payroll tax exemption even applies to wages paid to an employee if an employer lays off an employee because of a lack of work and later, when work picks up, hires a new employee. As previously mentioned, a downsized employee may satisfy the requirement as an employee terminated for cause.
For a rehire of a downsized employee to qualify, the temporary layoff must result in an actual termination of employment. The HIRE Act does not define the term “begin employment,” so the general principles relating to employment apply. This is a facts and circumstances determination regarding the establishment, maintenance and termination of the employer-employee relationship.
7. Does the qualified employee have to work a set period of time for the employer to be eligible for the exemption?
No. Application of the payroll tax exemption does not require that a qualified employee be employed for a set number of hours or a set number of weeks.
8. When should I choose the WOTC over the payroll tax exemption?
Employers may choose to apply the payroll tax exemption or claim the WOTC for an employee, but not both. An employer that wishes to claim the WOTC for a qualified employee may not apply the payroll tax exemption with respect to any wages paid to that employee from March 19, 2010, through December 31, 2010. Because WOTC eligibility covers the entire year (i.e., 2010), it may be advantageous to elect the WOTC rather than applying the HIRE Act incentives to employees hired towards the end of 2010.
Alvarez & Marsal Taxand Says:
The HIRE Act tax incentives apply to a large range of potential new employees. In addition, the reporting requirements are fairly limited and should not be a significant burden to most employers. Given the potential HIRE Act benefits, taxpayers should review their hiring activity during 2010, and seriously consider taking advantage of this incentive. Employers must also ensure that their books and records are in order to support the tax savings available under the HIRE Act.
As outlined above, the HIRE Act payroll tax exemption allows employers to avoid paying their 6.2 percent share of Social Security tax on all wages paid to qualified employees from March 19, 2010, through December 31, 2010. With no limit on a qualified employee’s salary that is eligible under the HIRE Act, this can be a significant incentive even for employers who are hiring a few new employees in certain high-paying areas, such as engineering.
A surprising number of taxpayers have been indifferent to the idea of applying for the HIRE Act benefits. In many cases, the HIRE Act offers significant payroll tax savings for companies that are hiring new employees during 2010. Because it is a limited, short-term program with a definite expiration date (the payroll tax exemption program does not even last a year and expires on December 31, 2010), many taxpayers seem hesitant to spend too much time developing the necessary systems and protocols required to comply with the HIRE Act rules. However, most employers already have similar systems in place to comply with their normal federal and state payroll tax reporting requirements. And, as mentioned above, if you are already taking advantage of the WOTC, it should be relatively painless to adapt your WOTC reporting procedures to the HIRE Act.
As with most tax incentives, an audit trail of proper documentation is important to sustaining the HIRE Act benefits. Standard documentation will include a Form W-11 for each new employee, maintained in an easily accessible format and location. Taxpayers should also be prepared to respond to questions about former employees who departed voluntarily or who were terminated.
Managing Director, Washington, D.C.
Andrew Martin, Senior Director, contributed to this article
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