Payroll Tax Forgiveness for New Hires

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after the date of enactment. This provision is in effect NOW. The IRS wants to remind everyone that this reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages. Eligible employers will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010. Revised forms and further details will be available from the IRS in the next few weeks.

The HIRE Act requires that the employer get a statement from each new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for someone else during the 60-day period. The IRS is currently developing a form employees can use to make the required statement. This form will be available in the near future.

Readers should note that this provision applies to businesses, agricultural employers, tax-exempt organizations and public colleges and universities, but no household employers can claim this new tax benefit. In addition, because the Act is intended to increase employment, this provision will not apply to a worker hired to replace another employee of the employer unless such employee separated from employment voluntarily or for cause. To prevent abuse, the provision also does not apply to a new employee who is a related party of the employer (as defined under rules similar to sec. 51(i) of the Code.

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