last update 5-1-2010

PAYROLL TAX EXEMPTIONS

Payroll Tax Exemption

The HIRE Act provides that a qualified employer is allowed an exemption from having to pay its share of Social Security taxes, for a qualified individual's employment from March 19, 2010 through December 31, 2010. The employee's share of Social Security taxes will still apply to the first $106,800 of wages in 2010. In addition, the employer's and employee's shares of Medicare tax still apply to all wages paid in 2010.

A qualified employer means any taxable business and tax-exempt organization. The payroll tax exemption only applies to wages paid to a qualified employee performing services in the employer's trade or business. Thus, the exemption does not apply to wages paid to household employees.

Qualified Employees

For purposes of the payroll tax exemption (and retention credit), a qualified employee includes any individual who:

1. begins employment with the qualified employer after February 3, 2010, and before January 1, 2011;

2. certifies, by signed affidavit under penalties of perjury, that they have not been employed for more than 40 hours during the 60-day period ending on the date the employment with the qualified employer begins;

3. is not hired to replace another employee of the qualified employer, unless the other employee voluntarily quit or was fired with cause; and

4. is not related to the employer in a way that would make him or her ineligible for the work opportunity credit (i.e., employees who are related to the employer or who directly or indirectly own more than 50 percent of the business).

The IRS has issued a new Form W-11 that employers may use to obtain a statement from an employee, confirming the employee's unemployed status for purposes of the exemption and retention credit. Employees must sign the form under penalties of perjury.

Comment

Employers are not required to use Form W-11 and may use a similar statement that provides the same information. Form W-11 is not provided to the IRS.

The IRS notes that it is not necessary that an individual had been previously employed and lost his or her job to be a qualified employee. The only requirement is that during the 60 days preceding the start of employment, the individual must have been unemployed or employed for less than 40 hours a week prior to being hired by the qualified employer. For this purpose, the 60-day period must be continuous. Thus, it can span from 2009 into 2010. In addition, an individual who was in school for some time during the 60 days preceding the start of employment (i.e., recent graduate) may still be considered a qualified employee.

Comment

Because the payroll tax exemption is not limited to wages paid to qualified individuals who were employed and lost their job, there is no requirement that the qualified employee must be a previously laid-off employee of the employer. The qualified employee can be a previously laid-off employee of the employer who is rehired, or a new hire.

Claiming the Payroll Tax Exemption

The payroll tax exemption is claimed on Form 941 beginning with the second quarter of 2010. A draft version of Form 941 to be used by employers for the second quarter to claim the exemption has been released by the IRS. The exemption (if any) for Social Security (or Railroad Retirement Act tier 1 taxes) for wages paid from March 19, 2010, through March 31, 2010, must also be claimed on the employer's Form 941 for the second quarter.

Comment

The IRS notes that an employer can claim the payroll tax exemption and the COBRA premium assistance credit on the same Form 941 beginning with the second quarter of 2010.

The HIRE Act provides that the exemption for the employer's share of Social Security for wages paid to a qualified employee applies automatically. A qualified employer that does not want to use the payroll tax exemption must make an affirmative election out of the exemption, under procedures to be provided by the IRS.

The IRS notes that if an employer applies the payroll tax exemption to wages paid to a qualified employee, such wages paid to the employee during the one-year period beginning with the employee's hiring date may not be taken into account for purposes of the work opportunity tax credit. Thus, an employer that wants to claim the work opportunity tax credit for a qualified employee must make an affirmative election out of the payroll tax exemption with respect to wages paid to that qualified employee.

The IRS has also answered some frequently asked questions (FAQs) on its web site at www.irs.gov


========================  WARNING  =======================
                      AND DISCLAIMER
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed.  Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a 
attorney to discuss the specific facts of your case
and the law of your state.
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last update 5-1-2010

PAYROLL TAX EXEMPTIONS