President Obama signed the “Jobs Bill” into law on March 18, 2010. Part of the Jobs Bill is the HIRE or “Hiring Incentives to Restore Employment” Act. The HIRE Act grants employers a tax exemption for their 6.2 percent Social Security (or FICA) payroll contribution for every new qualified employee hired between February 3, 2010, and before January 1, 2011, for wages paid beginning March 19, 2010.
A qualified employee is someone who has been unemployed for 60 days prior to accepting employment. Being “unemployed” means having worked less than 40 hours during the preceding 60-day period. To be qualified, the employee must not be hired to replace another employee unless the employee quit voluntarily or was fired for cause, which includes employees who were terminated as part of downsizing. Finally, a qualified employee must not be “related” to the employer as defined in the U.S. Tax Code.
In addition to the 6.2 percent exemption, employers may earn an income tax credit that is equal to 6.2 percent of paid wages, or up to $1,000, for every new qualified employee who is retained for 52 consecutive weeks. This credit will be taken on the employer’s 2011 income tax. To ensure eligibility for the income tax credit, the employer must ensure that the wages paid to any qualified employee during the last 26 weeks are at least 80 percent of what was paid to that employee during the first 26 weeks.
Employers may ask new qualified employees to fill out IRS Form W-11 or a similar statement that contains the same information and is signed under penalty of perjury. Completed forms must be kept by the employer in case the IRS ever questions whether the employer was entitled to the tax exemptions or credit.
The tax exemptions and tax credit could save real money for employers. Because the IRS has not offered particularly specific guidance on this program, however, it is best to err on the conservative side. Make sure that employees are offered the opportunity to fill out a W-11 upon hiring, but make sure those who are doing the hiring do not “oversell” the forms and do not tell every new hire to sign them. Although the terms of the program are pretty broad—allowing employers to take advantage of the tax benefits unless an employee is hired specifically to replace another—it is not clear what the IRS will ask an employer to show to prove that is the case.
Finally, there is no credit or refund available under the HIRE Act when filing the first quarter Form 941 or Employers Quarterly Tax Return. The IRS will issue a revised Form 941 next month, and any first quarter exempt wage amounts accumulated for March 19 through March 31 should be reported as a credit on the revised second quarter Form 941.