Employment Law Update

The Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, crated two new tax benefits for employers who hire certain previously unemployed workers (“qualified employees”).

The payroll tax exemption.

This tax benefit provides employers with an exemption from the employer’s 6.2 percent share of social security tax on wages paid to qualifying employees, effective for wages paid from March 19, 2010 through December 31, 2010. The exemption is available to any taxable businesses or tax-exempt organization. Household employers and most public employers cannot claim the exemption.

Qualified employees are individuals who begin employment with a qualified employer after February 3, 2010, and before January 1, 2011, who have been unemployed, or employed for less than 40 hours, during the 60-day period ending on the date employment begins, and who are not family members of or related in certain other ways to the employer. (The 60-day period must be continuous). Qualified employees must certify by an affidavit, signed under penalties of perjury, that they meet the qualifications. The affidavit should be signed before any wages are paid, otherwise a corrected return may be required or, in some cases, the exemption may be unavailable for some taxable quarters. A model affidavit that can be used for this purpose is available from the IRS.[1] Employers should retain signed affidavits with other payroll and income tax records. The affidavits do not need to be sent to the IRS.

The exemption does not apply to wages paid to an employee who is hired to replace an existing worker, unless the existing worker terminated employment voluntarily or was terminated for cause. An employer may, however, apply the exemption to wages paid to a rehired employee who is otherwise a qualified employee, or to a new employee who replaces an employee who is laid-off. The payroll tax exemption does not require that an employee be employed for any set number of hours or work weeks.

Business Credit for Retention of Certain Newly Hired Individuals in 2010.

For each qualified employee retained for at least 52 consecutive weeks, businesses will also be eligible for a general business tax credit, referred to as the new hire retention credit, of 6.2 percent of wages paid to the qualified employee over the 52 week period, up to a maximum credit of $1,000. The new hire retention credit can be claimed on the employer’s 2011 income tax return