Are You Looking to HIRE?

By Julie Ann Blazei
President/ CEO Tricom Funding

One of the hallmarks of the recession is the number of unemployed workers throughout the U.S. These numbers have reached new highs, the likes of which many of us have not seen in our lifetime.

As an attempt to encourage businesses to put unemployed people back to work, on March 18, 2010, President Obama signed the federal Hiring Incentive to Restore Employment Act (HIRE Act) into law. The HIRE Act adds two new tax benefits for employers as an incentive to employ laidoff workers. All employers, except certain government employers, may be eligible for these tax benefits.

What is the HIRE Act?

The HIRE Act is a special payroll tax exemption that applies to many newly hired workers during 2010. It creates a limited social security tax “holiday” for the employer’s share of social security tax on wages paid to a new hire who was previously unemployed. Also included is a separate business tax credit of up to $1,000 if the employee remains employed for at least 52 weeks.

How does the “Holiday” tax credit work?

The Act provides relief from the employer’s share of social security tax (not the employee’s). This is 6.2% of covered wages up to $106,800, on wages paid by a “qualified employer” to a “qualified individual” from March 19, 2010 through December 31, 2010. Wages earned by a qualified employee before March 19, 2010 but paid on or after March 19, 2010 do qualify for the social security tax relief as well. Wages earned before December 31, 2010 but paid after that date do not qualify. Simply put: wages paid from March 19, 2010 to December 31, 2010 qualify for the tax credit.

What is the definition of “qualified employer”?

A qualified employer is broadly defined as any employer other than the United States government, a state or local government, or any government instrumentality (other than public colleges and universities). Temporary employment agencies are considered qualified employers under the HIRE Act so long as the agency is the employer of record and the employees they place meet the definition of qualified individuals.

Let’s consider some special circumstances:

• Sub-contracting staffing: if you partner with another staffing agency, only the agency that is the employer of record would receive the credit.
• “Temp-to Perm” situation: for a “qualified employee” the client hiring the temporary on as a permanent employee would not be eligible for the credit. The staffing agency would be eligible for the credit on wages paid until the client hires the employee.

A qualified employer can elect to not have the social security tax “holiday” apply. The employer can make this election for each qualified individual, rather than having to make it for all qualified individuals at one time.

What is the definition of “qualified employee”?

A qualified individual is any employee who:

• Begins employment with a qualified employer after February 3, 2010, and before January 1, 2011;
• Certifies by signed affidavit, or similar statement under penalties of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employee begins employment with the qualified employer;
• Is not employed by the qualified employer to replace another employee unless the other employee separated from employment voluntarily or for cause (including downsizing); and
• Is not related to the qualified employer or to anyone owning 50% or more of the stock or other capital of the employer.

Also, an individual did not need to be on unemployment benefits to qualify.

The IRS broad interpretation of “terminated for cause” includes reasons other than employee misconduct. This can include performance issues and other “facts and circumstances,” including layoffs and plant closings. The employer cannot terminate one employee in order to claim the social security tax relief by hiring the same individual or another employee to fill that position.

Some examples of qualified employees cited by the IRS are:

• Rehired employees: an employee who was previously laid off and then rehired by the same or a related employer after a 60-day period can be a qualified employee so long as they did not work for the prior 60-day period.
• New Employees replacing those laid off: if an employer lays off employees because of lack of work and later hires new employees when work picks up again, the new employee can be qualified individuals if they meet the other qualifications.
• Recent graduates: new employees who have been in school for some or all of the 60 days before beginning employment can be qualified employees. It is not necessary that such employees have been previously employed and lost their jobs.
• Employees filling new positions: the employer can claim the social security tax relief even if the employer never laid off any employees, as long as it is filling new positions with qualified employees.
• Employees of a new business: an employer starting a new business can use the social security tax relief for qualified employees it hires.

Are there new IRS forms in conjunction with the HIRE act?

The IRS has developed for employers Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit. This form is used when having qualified employees certify that they have not been employed for more than 40 hours during the 60-day period ending on the date the employee begins work for the employer claiming the social security tax relief. Employers could rely on affidavits completed by employees under the age of 18 to the same extent they rely on Forms W-4 provided by such employee.

According to the American Staffing Association, staffing companies may use one of two dates to begin the 60-day look back period: the date of interview when the qualified employee agrees to be included in the agency’s roster, or when the qualified employee is placed on assignment. The key here is to be consistent, and choose one of these two options to use going forward for each qualified employee. You can download Form W-11 for your use by clicking here.

How does this credit get reported after the fact for first quarter Form 941, employer’s Quarterly Federal Tax Return?

For the first quarter of 2010, an employer would have paid its total FICA tax obligation as usual. The employer can now claim the amount that would have qualified for the social security tax reduction under the HIRE Act as a payment in the second quarter, which allows the employer to reduce its payroll tax payments for that quarter.

What actions should employers take?

Identify all current employees who may meet the requirements of a qualified employee and ask each such employee to sign the Form W-11 or form affidavit. Keep the original W-11. All rules that apply to the W-4 also apply to the W-11.

Also, employers should ask each newly hired qualified employee through the end of the year to sign an affidavit as well. Employers should coordinate with their payroll vendors or payroll departments to discuss adjusting their payroll systems to reflect the holiday tax credit.