By Jay A. Kennedy
May 20, 2010
The Hiring Incentives to Restore Employment (HIRE) Act provides new cost-saving measures for employers that hire and retain new employees.
OASDI Tax Exemption
Employers that hire new employees will be exempt from their share of the Old Age, Survivors and Disability Insurance (OASDI) tax, which is a 6.2 percent tax on wages up to $106,800 for 2010. The exemption will apply from March 19, 2010 to the end of 2010. Employers eligible for the OASDI exemption include taxable businesses, tax-exempt organizations and public colleges and universities.
Employers may claim an OASDI exemption for new employees, who:
-¢ Begin employment between Feb. 3, 2010 and the end of the year;
-¢ Certify by signing an IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, that they have not been employed for more than 40 hours during the previous 60-day period;
-¢ Do not replace another employee, unless the other employee left voluntarily or for cause; and
-¢ Are not related to the employer and do not own, directly or indirectly, more than a 50 percent interest in the employer.
The Form W-11 is available at http://apps.irs.gov/businesses/small/article/0,,id=220745,00.html.
For purposes of the OASDI exemption, new employees may include people who were previously laid off and rehired, and recent graduates who meet the above requirements.
Employers should claim the OASDI exemption on Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second quarter of 2010. Any OASDI exemption for the first quarter of 2010 should be claimed on the second quarter Form 941. The IRS is revising Form 941 to accommodate the OASDI exemption.
WOTC Tax Credit
Employers that claim the OASDI exemption may not also claim the Work Opportunity Tax Credit (WOTC) on wages paid during the new employee’s first year of employment. In general, the WOTC allows employers who hire members of specified target groups before September, 2011 to claim a credit equal to 40 percent of first year wages up to $6,000, with higher wage limits for certain target groups. Employers may prefer to claim the WOTC for low-wage employees in a target group because the WOTC will result in a higher tax benefit. For example, an employer could generally claim a WOTC of $2,400 (40 percent x $6,000) for a new targeted employee making $20,000 a year, versus an OASDI exemption of only $1,240.
Business Credit for Retaining New Employees
For tax years ending after March 18, 2010, the HIRE Act also allows employers to claim an additional one-time business credit of up to $1,000 per employee for retaining new employees hired in 2010. These “retained workers” are employees who:
-¢ Were employed on any date during the taxable year;
-¢ Were employed for at least 52 consecutive weeks; and
-¢ Had wages during the last 26 weeks of the period equal to at least 80 percent of the wages received for the first 26 weeks of the period.
The available credit is the lesser of $1,000 or 6.2 percent of the wages paid during the 52-week period. An employer may carry forward the credit, but may not carry it back.
Jay A. Kennedy is senior counsel at Warner Norcross & Judd LLP. His practice areas include corporate tax planning, exempt organization qualification and planning, estate planning and individual income tax planning. He can be reached at [email protected].