Washington has recently enacted the HIRE Act (Hiring Incentives to Restore Employment). This new law includes two tax incentives to be claimed by employers who hire workers who were previously unemployed or only working part time. The tax benefits apply to workers hired after Feb. 3, 2010 and before Jan. 1, 2011 and/ or for each worker employed for at least a year.
The first payroll tax exemption involves the employer's share of Social Security tax on qualified employees starting on wages paid on March 19, 2010. The employer will be exempt from their 6.2% Social Security tax through December 31, 2010. One note to employers the employee share of Social Security and Medicare taxes are not exempt as well as the employer portion of Medicare withholding.
The second payroll tax credit (hire retention credit) applies in the case of the newly hired workers staying employed for at least a year. Business owners may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.
The IRS will be releasing a modified 2010 Form 941 for second quarter 941 filing in order to claim the payroll tax exemption. The payroll exemption is based on when wages are paid regardless of when the wages were earned. Wages paid to qualified employees during the first quarter from March 19, 2010 to March 31, 2010 will be claimed on the second quarter Form 941 as a credit. The amount of the pursuing credit will be refunded to the employer or applied towards a liability in a following quarter. The exemption must be claimed on the return for the quarter in which the wages were paid.
Employers will be able to pick and choose employees in which to apply the exemption. Once the employer claims the exemption for a particular employee the exemption must be applied to all wages paid from March 19, 2010 to through December 31, 2010. An employer does not have to opt out of the payroll tax exemption for qualified employees she simply reports and pays the employee and employer shares of the social security tax.
Employers will be reporting the amount of wages and tips covered by the new payroll tax exemption on Form W-2 and W-3. Box 12 of Form W2 will be used to report the total under Code CC. Form W3 will include a new box 12b to report the combined total of all the respective wages and tips covered by the Hire Act tax exemption.