Under the HIRE Act, if you hire an employee who was unemployed for at least 60 days, you do not have to pay the employer’s share of Social Security taxes on wages paid between March 18, 2010 and December 31, 2010. You also are entitled to a tax credit of up to $1,000 if the employee remains employed for 52 weeks. Here is a more detailed overview:
Eligibility: There are several eligibility requirements for both FICA relief and the tax credit:
- The employee must begin work after February 3, 2010 and on or before December 31, 2010.
- The employee must provide a signed affidavit affirming, under penalty of perjury, that he or she has been employed for 40 or fewer hours during the 60-day period ending on the employment commencement date. The IRS is developing a model form for this purpose.
- The incentives are not available if the employee is replacing another employee who was involuntarily terminated, other than for cause. In other words, an employer cannot qualify for the incentives by terminating a current employee without cause and hiring a replacement who otherwise qualifies.
Scope of the Relief: The FICA relief applies to wages paid on or after March 18, 2010 and before December 31, 2010. The relief does not apply to the Medicare portion of FICA, the employee’s share of the Social Security tax, or to federal or state unemployment taxes.
Mechanics of Relief: The employer is entitled to a credit on its second quarter FICA return for FICA taxes paid during the first quarter of 2010 with respect to qualifying wages. An employer may opt out of the FICA relief if it decides that the savings is not worth the administrative hassle. The IRS announced last week that they will issue additional guidance regarding both of these features in the next few weeks.
52-Week Tax Credit: In order for an employer to qualify for this credit, the employee must remain employed for 52 weeks, and the wages for the final 26 weeks must equal at least 80% of the wages for the first 26 weeks. The tax credit is equal to the lesser of $1,000 or 6.2% of wages, so the credit will be smaller for employees who earn less than $16,129. The credit may not be carried back to a tax year beginning prior to March 18, 2010.
Work Opportunity Tax Credit (WOTC): The WOTC entitles employers to a tax credit for hiring members of certain targeted groups, such as veterans and troubled youths. When a new hire could trigger FICA relief under the HIRE Act and the tax credit under the WOTC, the employer will need to determine which of the two provides the greater benefit. The default rule is that the HIRE Act applies – as such, an employer who would receive a larger tax credit from the WOTC for a given employee must affirmatively opt out of the HIRE Act with respect to that employee. Note that the WOTC does not appear to impact eligibility for the 52-week tax credit.