Form to Claim Payroll Tax Exemption for Hiring New Workers Now Available

WASHINGTON — The Internal Revenue Service has issued the newly revised
payroll tax form that most eligible employers can use to claim the special payroll
tax exemption that applies to many new workers hired during 2010.

Designed to encourage employers to hire and retain new workers, the payroll
tax exemption and the related new hire retention credit were created by the
Hiring Incentives to Restore Employment (HIRE) Act signed by President Obama
on March 18.

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 the employer’s share of Social Security tax on wages
paid to these workers after March 18. This reduction will have no effect on
the employee’s future Social Security benefits. The employee’s 6.2
percent share of Social Security tax and the employer and employee’s shares
of Medicare tax still apply to all wages.

In addition, for each qualified employee retained for at least a year whose
wages did not significantly decrease in the second half of the year, businesses
may claim a new hire retention credit of up to $1,000 per worker on their income
tax return. Further details on both the tax credit and the payroll tax exemption
can be found in a recently-expanded list of answers to frequently-asked
questions about the new law now.

How to Claim 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. The HIRE Act
does not allow employers to claim the exemption for wages paid in the first
quarter but provides for a credit in the second quarter. The instructions for
the new Form 941 explain how this credit for wages paid from March 19 through
March 31 can be claimed on the second quarter return.

The HIRE Act requires that employers get a signed statement from each eligible
new hire, certifying under penalties of perjury, that he or she was not employed
for more than 40 hours during the 60 days before beginning employment with that
employer. Employers can use new Form W-11, Hiring Incentives to Restore Employment
(HIRE) Act Employee Affidavit, released last month, to meet this requirement.
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 other payroll and income tax
records.

These two tax benefits are especially helpful to employers who are adding positions
to their payrolls. New hires filling existing positions also qualify as long
as they are replacing workers who left voluntarily or who were terminated for
cause and otherwise are qualified employees. Family members and other relatives
do not qualify for either of these tax benefits.

Businesses, agricultural employers, tax-exempt organizations, tribal governments
and public colleges and universities all qualify to claim the payroll tax exemption
for eligible newly-hired employees. Household employers and federal, state and
local government employers, other than public colleges and universities, are
not eligible.

Payroll