Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

On March 18, 2010, two new tax benefits were enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act. The tax benefits are available to employers hiring workers who were previously unemployed or only working part-time.

Agricultural employers, for-profit and nonprofit businesses, tax-exempt organizations, tribal governments and public colleges and universities all qualify to claim the payroll tax benefit for eligible recently hired employees.

The first tax incentive, referred to as the payroll tax exemption, provides employers with an exemption from the employer's 6.2% share of Social Security taxes on wages paid to qualified hires (after Feb. 3, 2010, and before Jan. 1, 2011) who were previously unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during such 60-day period ("qualified employee"). The employer is required to obtain a statement from each qualified employee certifying such information. The new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is available on the IRS Web site (click here) and may be used to meet this requirement. Family members and employees hired to replace an existing worker who was involuntarily terminated without cause are not considered qualified employees. Only wages paid March 19, 2010, through December 31, 2010, are eligible for the tax holiday.

Employers will still need to withhold the employee's 6.2% share of Social Security taxes, as well as income taxes. This payroll tax exemption will not affect the employer's and qualified employee's shares of Medicare, FUTA and UI taxes that still apply to these wages.

The second tax incentive, referred to as the new hire retention credit, provides employers with a general business tax credit of 6.2% of wages paid to each qualified employee retained for at least 52 consecutive weeks, up to a maximum credit of $1,000 per employee.

Employers will be able to claim the payroll tax exemption on their revised federal employment tax form beginning with the second calendar quarter of 2010. For wages paid during the first quarter, a credit can be claimed for the tax holiday on the second quarter return. A revised draft of Form 941, Employer's Quarterly Federal Tax Return, is currently posted on the IRS Web site (click here) and will be released in final form sometime this month. The new hire retention credit will be claimed on the employer's 2011 income tax return.