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Employment Update

Hire Act Payroll Tax Exemption and Credit
June 15, 2010

On March 18, 2010 President Obama signed into law the Hiring Incentives to Restore Employment Act (the "Hire Act").  Two significant provisions of the Hire Act:  (1) a payroll (FICA) tax exemption for employers that hire unemployed workers, and (2) a tax credit of up to $1,000 for keeping those new hires on the payroll for at least one year.

The payroll tax exemption is an exemption from the Employer's 6.2% share of social security tax on all wages paid to qualifying employees from March 19, 2010 through December 31, 2010.  The employee's 6.2% share of social security tax and the employer's and employee's shares of Medicare tax still apply to all wages.

A Qualified Employee is an individual who begins employment with a Qualified Employer after February 3, 2010 and before January 1, 2011, who has been unemployed or employed for less than 40 hours during the sixty day period ending on the date such employment begins, and who are not family members of or related to the Qualified Employer in a way that would disqualify the Qualified Employer from the Work Opportunity Tax Credit under Code Section 51(i)(1).  Qualified Employees must certify by signed affidavit under penalty under perjury that they have not been employed for more than 40 hours during the sixty-day period ending on the date that they started employment.

Qualified Employer:  Tax exempt organizations and taxable businesses both qualify for the payroll tax exemption.  Public colleges and universities can qualify but government employers generally do not qualify for the payroll tax exemption.  The payroll tax exemption also does not apply to household employers. 

If an employer mistakenly applies the exemption to wages paid to a non-qualified employee, the employer is liable for the amount of employer's social security tax on wages it erroneously reported as exempt.

The payroll tax exemption may be applied by an employer to wages paid to a laid-off employee who is otherwise a qualified employee as defined above, where the employee was laid off and then rehired by the same or related employer after the sixty-day period.  A recent school graduate who has been in school for some or all of the sixty days preceding the start of her employment can be a qualified employee; she does not have to have been previously employed and lost her job to be a qualified employee.

An employer is not required to apply the payroll tax exemption to all of its qualified employees, but for each employee to which the exemption is applied, it must be applied to all wages paid to that employee for March 19, 2010 through December 31, 2010.

The Internal Revenue Service has issued additional guidance in the form of frequently asked question (FAQ's), which can be easily located online. Links are as follows:

  • FAQs About the Payroll Tax Exemption and Qualified Employers
  • FAQs About Qualified Employees
  • FAQs About Claiming the Payroll Exemption

For more information, please contact a member of Moore & Van Allen's Employment & Labor Practice Group.

To ensure compliance with requirements imposed by the IRS, unless specifically indicated otherwise, any tax advice contained in this communication was not intended to be written or used, and cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing, or recommending to another party any tax-related matter addressed herein.

This electronic newsletter includes information about legal issues and legal developments. Such material is for informational purposes only and is not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact your attorney for advice on specific legal problems.