Tax Break for Firms Now Hiring

Businesses that hire the unemployed should start gearing up to claim a sweet payroll tax break for 2010.

Under a new law, employers don’t have to pay their 6.2% share of Social Security tax on the wages of employees hired after Feb. 3, 2010, as long as the new hire has worked less than 40 hours in the previous 60 days. The exemption applies to wages paid after March 18, 2010, and before Jan. 1, 2011. However, the employee’s 6.2% share of the tax still must be collected and sent to the IRS. The same goes for the employer and employee shares of the 1.45% Medicare tax. Congress passed the credit to spur job creation, so if a new hire replaces an employee, the credit is allowed only if the employee quit voluntarily or was fired for cause.

Employers will claim the payroll tax relief on Form 941, the quarterly payroll tax return. Although the 6.2% exemption applies to wages paid beginning March 19, which is in the first quarter, employers will have to wait until the second quarter to claim the break on wages paid from March 19-31. That’s because IRS has to revise the 941 to reflect the exemption. In the interim, firms can get the benefit of the break by reducing their tax deposits by the amount of the Social Security tax exemption.

Employees will have to certify to the employers that they worked less than 40 hours in the previous 60 days and thus are eligible for the payroll tax credit. They will use new Form W-11 for this purpose.

The Social Security tax break will affect reporting on Form W-2 as well. The amount of wages that are excluded from Social Security tax under the new law will be listed in box 12 of the W-2, using code CC.

An additional sweetener takes effect next year: Businesses will receive a credit of up to $1,000 for each qualified hire who is kept on the payroll for at least one year. The credit is the smaller of $1,000 or 6.2% of wages paid to eligible employees. This break will be claimed on the company’s tax return for 2011.