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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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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Form 941 likely to be revised several times in 2010

The IRS is working on revising Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter return due on Aug. 2, 2010. The revisions are necessary because of recent legislation in the “Hiring Incentives to Restore Employment Act” (HIRE Act, P.L. 111-47) that provides a Social Security tax exemption to certain employers that hire unemployed workers between March 19, 2010 and Dec. 31, 2010. Under the legislation, qualified employers will not have to pay their share of the Old Age, Survivors and Disability Insurance tax (OASDI, commonly known as the Social Security tax) on wages paid to a “qualified individual.” The OASDI tax rate is 6.2%. A qualified individual is anyone who:

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

 (1)     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;

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

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

Businesses, agricultural employers, tax-exempt organizations, and public colleges and universities all qualify to claim this tax benefit. Household employers cannot claim this tax benefit.

This payroll tax relief applies only to wages paid with respect to employment during the period from March 19, 2010 to Dec. 31, 2010. Employers may not claim a Social Security tax exemption on new hires who were first paid wages between Feb. 3, 2010 and March 18, 2010. The Social Security tax exemption will be reported by many employers on Form 941, Employer’s Quarterly Federal Tax Return. The exemption earned for the period from March 19, 2010 to March 31, 2010 may not be claimed on the first quarter Form 941. The tax benefit that employers would have received in the first quarter of 2010 will be claimed on the second quarter Form 941 instead. The IRS has issued a draft version of a revised Form 941 that would be effective beginning with second quarter returns due on Aug. 2, 2010.

The draft version of Form 941 includes the following lines:

·       Line 6a. Number of qualified employees hired or first paid this quarter.

·       Line 6b. Number of qualified new employees who were paid wages this quarter.

·       Line 6c. Exempt wages and tips paid this quarter.

·       Line 6d. Line 6c × .062.

·       Line 12c. Number of qualified individuals paid first quarter wages after March 18 and before April 1.

·       Line 12d. Exempt first quarter wages and tips paid after March 18 and before April 1.

·       Line 12e. Line 12d × .062.

The IRS discussed the draft Form 941 in a payroll industry teleconference call. Shelley Dockstader, IRS Acting National Account Manager, Electronic Tax Administration, pointed out that employers will still compute Social Security taxes on line 5a of Form 941 the same way they did before enactment of the HIRE Act legislation. However, their employment tax liability will be reduced by the amount that they report on line 6d (Social Security tax exemption on new employees hired in second quarter 2010). The amount reported on line 12e (Social Security exemption on new employees hired from March 19, 2010 to March 31, 2010) will be added to other credits that may be applied against an employer’s employment tax liability.

Understanding the HIRE Act. John Tuzynski, Chief of Employment Tax Operations for the IRS’s Small Business/Self-Employed Division, said that eligibility for the exemption is based on the date the new hire was actually paid (i.e., the “check date”). The IRS did not see any reason why an employer could not claim the exemption on a rehired employee who met the above eligibility requirements, as long as the employee wasn’t let go and then rehired in order to claim the exemption.

Employers should reduce their tax deposits to take into account the exemption. Employers who were eligible for the exemption from March 19, 2010 to March 31, 2010 should reduce their first tax deposit in April 2010. The tax liability reported on Form 941, Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, should be lower because of the exemption claimed on new employees hired in the second quarter of 2010. The second quarter Schedule B should not be adjusted to take into account the exemption claimed on new employees hired from March 19, 2010 to March 31, 2010.

Form W-2 will need to be revised to take into account the legislation.

It’s possible that the draft Form 941 will be revised again. Forms 941-PR, 941-SS, CT-1, and the amended forms in the “X” series will also need to be revised. There will also be a new version of Form 941 for the third quarter of 2010.

New tip examination adjustment line. The draft Form 941 also includes line 5e, Section 3121(q) Notice and Demand tax due on unreported tips. The IRS has started a new compliance program to determine whether employers are paying their share of the FICA tax reported on Form 4137, Social Security and Medicare Tax on Unreported Tip Income. Quarterly filers who owe additional tax may report this tax on line 5e.

Source:  Payroll Updates on Checkpoint Newsstand tab 3/24/2010

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Hire Act Tax Credit on Form 941 June 30th

For the latest on the IRS website on the New Hire Tax Credit:

http://www.irs.gov/businesses/small/article/0,,id=220746,00.html

For the new 941 for the 2nd Quarter ending June 30th:

http://www.irs.gov/pub/irs-pdf/f941.pdf

IR-2010-33, March 18, 2010 WASHINGTON — Two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law today.

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 March 18, 2010.

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.

In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

The two tax benefits are especially helpful to employers who are adding positions to their payrolls.

New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause.

Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible 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.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees.

Household employers cannot claim this new tax benefit.

Employers claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS.

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 on these two new tax provisions will be posted on IRS.gov during the next few weeks.

Post script warning:  The IRS is rejecting Form 941-Xs that are filed for the first quarter of 2010 since the payroll tax exemption could not be claimed on Form 941 until the second quarter. The second quarter return included the payroll tax exemption for the period from March 19 to March 31, 2010.

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