More Payroll Tax Exemption FAQs

The payroll tax exemption FAQs are divided into the following three categories: (1) FAQs about the payroll tax exemption and qualified employers (QR); (2) FAQs about qualified employees (QE); and (3) FAQs about claiming the payroll exemption (PE).

When does employee begin work? The IRS notes that the HIRE Act does not address when an individual begins employment; therefore, general principles relating to employment apply. Under these general principles, employment includes the establishment, maintenance, and termination of the employer-employee relationship, all of which depend on the facts and circumstances. Accordingly, an individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is first established.

Rehired employee. If an individual was previously employed by a qualified employer, then terminated, and subsequently rehired, the individual will be considered to have started employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is reestablished [IRS FAQ QE 17, 7/23/10].

Qualified employee status. An individual who has been on furlough, standby status, or temporary layoff will be considered a qualified employee when he or she resumes active status only if the furlough, standby status, or temporary layoff, constitutes a termination of employment and, upon reestablishment of the employment relationship, the requirements to be a qualified employee are satisfied. Whether an employment relationship has been terminated is based on the facts and circumstances [IRS FAQ QE 18, 7/23/10].

The payroll tax exemption may be claimed on: (1) wages paid to an employee hired to replace a worker who terminated employment voluntarily, as long as the employee is otherwise a qualified employee; (2) wages paid to an employee hired to replace an individual who was terminated for gross misconduct, as long as the employee is otherwise a qualified employee; (3) wages paid to an employee hired to replace an individual who was terminated due to poor performance, as long as the employee is a qualified employee; and (4) wages paid to an employee hired to replace a worker whose employment was previously terminated as part of a reduction in force due to lack of work, if the employee is otherwise a qualified employee. The payroll tax exemption may also be claimed on an employee who was terminated as part of a reduction in force and then is subsequently rehired, as long as the rehired employee is otherwise a qualified employee [IRS FAQs QE 20-23, 7/23/10].

Self-employed individuals. For purposes of “qualified employee” status, work performed as a self-employed individual does not count in determining whether an individual has been employed for 40 hours or less during the 60-day period ending on the date before the individual begins employment [IRS FAQ QE 19, 7/23/10].

Minors. Minors may sign the HIRE Act employee affidavit (under penalties of perjury). Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, may be used for this purpose [IRS FAQ QE 24, 7/23/10].

Reporting agents. An employer is not required to provide copies of Form W-11 to its reporting agent. There are no specific payroll tax exemption procedures for employers that use reporting agents [IRS FAQ PE 25, 7/23/10].

Click this link to view the IRS HIRE Act Payroll Tax Exemption FAQs, as updated on July 23, 2010:  http://www.irs.gov/businesses/small/article/0,,id=220745,00.html

Claiming the exemption, updated July 29, 2010: http://www.irs.gov/businesses/small/article/0,,id=220750,00.html

Employees defined:  http://www.irs.gov/businesses/small/article/0,,id=220749,00.html

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941 New Hire Issues Answered – Seasonal Employers Eligible

The IRS has been receiving incorrect Forms 941 for the 2nd Quarter 2010 when it comes to the new hire 6.2% Social Security payroll tax exemption.  It took me a moment to understand the difference between questions 6a and 6b on the Form 941.  Read it carefully!  The Form 941 is ACCUMULATIVE in reporting the number of NEW HIRE QUALIFIED employees CONTINUING TO QUALIFY on line 6b for the exemption as compared to those added each quarter on line 6a.   Fortunately for those with QuickBooks Payroll, the QuickBooks 941 “interview” screen asks the right questions, so that it is correctly stated on the Form 941.

The other question that came up last night when preparing a Form 941 for a seasonal employer was whether their employees meet the qualifications.  I didn’t see why not, because everything fit the definition.  They won’t qualify for the $1,000 tax credit in the future because the jobs won’t last.  Then this morning came this great news from yesterday’s IRS’s HIRE Act Webinar:

 “Seasonal employees. The IRS was once again asked if an employer can claim the payroll tax exemption on a seasonal worker. The IRS responded that the employer can claim the exemption if the employment relationship had ended prior to Feb. 4, 2010, and the employee was rehired after that date. For example, if an employee was on the payroll in the Spring and Summer of 2009, terminated in the Winter of 2009, and then rehired after Feb. 3, 2010, the employer would be able to claim the payroll tax exemption on that employee if the employee met all of the requirements to be a “qualified individual.” For purposes of the HIRE Act, a “qualified individual” is anyone who:

1.      begins work for a qualified employer after Feb. 3, 2010 and before Jan. 1, 2011;

2.      signs Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, or other similar statement certifying, under penalties of perjury, that he or she had not worked more than 40 hours during the 60 days prior to beginning employment;

3.      is not employed to replace another employee of the employer unless that former employee separated from employment voluntarily, or for cause; and

4.      is not related to the employer (under rules similar to those for related individuals in IRC §51(i)) [IRC §3111(d)(1)].

Part-time employees. The IRS also stated that an employer may be able to claim the payroll tax exemption on a part-time employee if he or she meets the qualified individual requirements noted above. An employer may also be able to claim the retention credit on a part-time employee if the employee meets the qualified individual requirements”

Keep in mind that the IRS will be examining returns with the payroll tax exemptions and they will expect employers to have the backup documentation with signed Forms W-11 and the underlying payroll earnings records, and they may even request signed statements from the employer on the reason for the available job, to make sure that someone wasn’t let go to make room for a payroll tax exemption!

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New 3.8% “Medicare” tax on Net Investment Income for ALL Individual Taxpayers!

Effective January 1, 2013, as the law is currently written, a 3.8% Medicare tax will be imposed on all net investment income (interest, dividends, annuity income, capital gains, rents and royalties, etc.) reported on individual income tax returns.  Here is the new Section of the law recently passed as part of the health care reform:

‘‘SEC. 1411. IMPOSITION OF TAX.

‘‘(a) IN GENERAL.—Except as provided in subsection (e)—
‘‘(1) APPLICATION TO INDIVIDUALS.—In the case of an individual,
there is hereby imposed (in addition to any other tax
imposed by this subtitle) for each taxable year a tax equal
to 3.8 percent of the lesser of—
‘‘(A) net investment income for such taxable year, or
‘‘(B) the excess (if any) of—
‘‘(i) the modified adjusted gross income for such
taxable year, over
‘‘(ii) the threshold amount.
‘‘(b) THRESHOLD AMOUNT.—For purposes of this chapter, the
term ‘threshold amount’ means—
‘‘(1) in the case of a taxpayer making a joint return under
section 6013 or a surviving spouse (as defined in section 2(a)),
$250,000,
‘‘(2) in the case of a married taxpayer (as defined in section
7703) filing a separate return, 1⁄2 of the dollar amount determined
under paragraph (1), and
‘‘(3) in any other case, $200,000.

Now Congress might have intended this tax to apply only to high income individuals (over $250,000 married, filing jointly or over $200,000 as a single individual), but that is NOT how the law is written.

If you’re already over the $250,000, you can add this new 3.8% tax to the income taxes you’re already paying.   If you’re under the $200,000 in adjusted gross income, you might want to ask your Congressional representatives if they’re going to fix this error, which if the Internal Revenue implements literally, will make all of us pay the 3.8% on even our little savings accounts, but it will especially hit the elderly on fixed incomes who depend upon their annuities and other investments in their retirement.

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IRS provides further information on payroll form changes due to new HIRE Act legislation

IRS Teleconference 4/1/2010

The “Hiring Incentives to Restore Employment Act” (HIRE Act, PL 111-147) encourages companies to hire unemployed workers by exempting certain wages from Social Security taxes (payroll tax exemption), and by providing employers with a business tax credit if new hires are retained for at least 52 consecutive weeks. There will be changes to several tax forms as a result of the legislation.

The IRS provided an update on those changes in an April 1 payroll industry teleconference call.

Form 941. The IRS will be revising the second quarter Form 941, Employer’s Quarterly Federal Tax Return, due on Aug. 2, 2010. The IRS expects to finalize the new version on April 6.

The electronic specifications for the form will be revised at a later date. A draft version of the form included a new line to report tip adjustments. That line will not be included in the final version of the form. The IRS expects to include the tip adjustment line on the 2011 Form 941.

Form W-11. An employer may not claim the payroll tax exemption unless the new hire certifies by signed affidavit (under penalties of perjury) that he was employed for a total of 40 hours or less during the 60-day period ending on the date the employment begins.

The IRS has drafted Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, to help employers meet this requirement. http://www.irs.gov/pub/irs-pdf/fw11.pdf

The form does not need to be notarized. The IRS expects employees to be able to sign the form electronically at some point.

Form W-2/W-3. There will be a new code on box 12 of the 2010 Form W-2 (Code CC) to indicate that a new hire had wages that qualified for the payroll tax exemption. Form W-3, Transmittal of Wage and Tax Statements, will be revised to include a line for total aggregate exempt wages.

Source: WG&L Accounting & Compliance Alert Checkpoint 4/2/2010

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Buried in the Health Care Reform….

The Patient Protection and Affordable Care Act (H.R. 3590) Implementation Timeline FINAL

Inside the pdf above is a time line of the various major provisions contained in the “health care reform”, officially known as the “PPACA”.  The biggest surprise is the requirement to file 1099-MISC for payments to EVERYONE and EVERY ENTITY when payments exceed $600, beginning with calendar year 2012.  Congress wants to close the “tax gap” and feels that if everyone reports on everyone else, they will collect more tax revenues to pay for this “health care reform”.

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