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Rev. date: 07/2010

A New Tax Exemption and Business Credit are Available for Qualified Employers Under "The HIRE Act" of 2010



Tele-Tax Topic 759

The Hiring Incentives to Restore Employment (HIRE) Act, signed into law March 18, 2010, created two new tax benefits that are available to employers who hire certain "qualified employees" in their trade or business.

— The Payroll Tax Exemption —


The Payroll Tax Exemption provides qualified employers with an exemption from the employer's 6.2% share of social security tax on wages paid to "qualified employees" from March 19, 2010, through December 31, 2010. The employees' 6.2% share of social security tax, and the employers' and employees' share of Medicare tax, still apply to all wages.

Qualified Employees


A qualified employee is any employee who:
  1. Begins employment with a qualified employer after February 3, 2010, and before January 1, 2011
  2. Is not a family member of or related in certain other ways to the employer
  3. Is not employed by the qualified employer to replace another employee of such employer unless such other employee terminated employment voluntarily or was terminated for cause, and
  4. Certifies 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 he or she begins such employment
Employers can use new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, to meet the employee affidavit requirement. Employers are required to obtain an affidavit with the same information as the Form W-11, but they are not required to use Form W-11. Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS. Instead, they must retain them along with their other payroll and income tax records.

Qualified Employers


The following list identifies which employers qualify for the payroll exemption:
  1. Taxable businesses and tax-exempt organizations qualify to claim the payroll tax exemption for eligible newly-hired employees.
  2. Qualified employers in all five U.S. territories (i.e., American Samoa, Commonwealth of the Northern Mariana Islands, and Puerto Rico) that are subject to social security tax also qualify for the payroll tax exemption.
  3. Federal, state and local government employers generally do not qualify for the tax exemption. However, public colleges and universities can qualify. Indian tribal governments also qualify.
  4. Household employers do not qualify.

Claiming the Payroll Tax Exemption


Form 941, Employer's QUARTERLY Federal Tax Return, revised for use beginning with the second calendar quarter of 2010, will be filed by most employers claiming the payroll tax exemption for wages paid to qualified employees. Annual employment tax returns, such as Form 944, Employers's ANNUAL Federal Tax Return, will also be used to claim the payroll tax exemption.
The HIRE Act does not allow employers to claim the exemption for qualified wages paid in the first quarter, from March 19, 2010, through March 31, 2010, but instead provides an offsetting credit to be claimed for the second quarter. The instructions for the new Form 941 explain how this offsetting credit for wages paid from March 19 through March 31 can be claimed on the second quarter return.
Qualified employers may elect out of the payroll tax exemption by reporting and paying the employer share of social security tax on wages paid to qualified employees, along with the employee share of social security tax, Medicare taxes, and withheld income tax.

— The HIRE Retention Credit —


The Retention Credit provides employers with a General Business Credit of up to $1,000 for each qualified employee they retain for at least 52 consecutive weeks, whose wages do not significantly decrease during the last 26 weeks. The amount of the credit is the lesser of $1,000 or 6.2 percent of wages (as defined for income tax withholding purposes) paid by the employer to the retained qualified employee during the 52 consecutive week period. The qualified employee's wages for such employment during the last 26 weeks must equal at least 80% of wages for the first 26 weeks. This credit cannot be carried back to years beginning before March 18, 2010, but may be carried forward. The credit will be claimed on the employers income tax return.
For additional information about the new payroll tax exemption and retention credit created by The HIRE Act of 2010, see Frequently-Asked Questions.