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Dear Tax Talk,
Under the new HIRE (Hiring Incentives to Restore Employment) Act that was just passed into law, what are the benefits of adding employees? What do I have to provide as proof so as to avoid paying the employer share of taxes?
To help America get back to work, the federal government is having a sale on payroll taxes. There are instant savings and a rebate in the form of a tax credit.
Employee wages are subject to payroll taxes, which include amounts withheld from employees plus matching contributions, which are the employer’s burden. The matching payroll taxes are FICA at 6.2 percent and Medicare at 1.45 percent. The new law eliminates the FICA match for the employer of a new hire who certifies that he has been unemployed for 60 days prior to commencing work. New hires are considered unemployed if in those 60 days they have not worked more than 40 hours. The new hires certify their unemployed status by completing the rather simple new Form W-11.
While it would be ideal to get the certification together with the other traditional forms such as the W-4 and I-9, a later certification is still valid. The employer retains the certification in case of examination. The employer makes the appropriate adjustments to taxes when depositing and filing their quarterly Form 941, which is in the process of revision.
The exemption applies to new hires after Feb. 3, on wages paid between March 19 and Dec. 31. The employee’s withholding is unchanged in that they continue to have income, FICA and Medicare taxes withheld. Because many companies depend on payroll tax software, you need to be up to date on your subscription so that you can properly track the exempt payroll as well as take advantage of the rebate.
The rebate comes in the form of a nonrefundable tax credit available on an employer’s 2011 income tax return due in 2012. For each new unemployed hire that completes 52 consecutive weeks of service, the employer can claim an income tax credit equal to the lesser of $1,000 or 6.2 percent of wages paid in the 52 weeks. The $1,000 maximum credit is equivalent to about $16,000 in wages per new hire. If an employer has 10 new hires paid at least the minimum of $16,000 each, the income tax credit would be $10,000.
While the new hire FICA exemption only applies to wages between March 19 and the end of the year, the retention credit can include wages paid in 2011.
If you have new hires since Feb. 3, you can still qualify them for the exemption. As long as the new hire certifies by July 31, you can claim the exemption for wages paid between March 19 and June 30 on the 2nd quarter Form 941.
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.