The IRS has recently posted a revised payroll tax form that many eligible employers can use to receive the new payroll tax exemption.  This exemption is meant to encourage employers to hire and then retain new workers.  The exemption would apply to new hires after Feb. 3, 2010 and before Jan, 1, 2011.  The employer may qualify for a 6.2% payroll tax incentive.  Essentially this will exempt employers from paying their share of the Social Security tax on wages paid to these new hires after March 18.  There will be no effect on the employee's future Social Security benefits due to this reduction. 

Additionally, for each employee that qualifies, and is employed for at least a year, and whose wages did not significantly drop in the second half of the year, businesses may claim a new hire retention credit of up to $1,000 per worker on their tax return. 

For more information on the Hiring Incentives to Restore Employment (HIRE) act signed by President Obama March 18, see the IRS.gov, or the Questions and Answers page.

How to claim the payroll tax exemption

Employer's quarterly Federal Tax Return (Form 941) has been revised for use beginning in the second quarter of 2010.  The HIRE act does not apply to the first quarter, but applies starting in the second quarter.  Instructions for form 941 are now available on the IRS website.

The HIRE act does require that employers receive a signed statement from each eligible new employee, certifying under penalty of perjury that they were not employed for more than 40 hours during the 60 days before beginning employment with that employer.  Employers can use form W-11 to satisfy this requirement.  Although employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS, but instead retain them along with other payroll and income tax records.

Employers who are adding positions to their payrolls or filling existing positions (granted previous employees left voluntarily or were terminated for cause) will benefit from these tax incentives.  Family members and other relatives do not qualify for either of these benefits. 

Businesses, agricultural employers, tax-exempt organizations, tribal governments, and public colleges and universities all qualify to claim the payroll tax exemptions.  Federal, state, and local governments (other than public colleges and universities) and household employers are not eligible for these tax benefits. 

The proposed amendment is to relieve S Corp shareholders from a proposed new tax.  The AICPA has sent a letter to congress, urging that the new provision be stricken or modified.  The American Jobs and Closing Tax Loopholes Act of 2010, has passed in the House and is being debated in the Senate, including this controversial provision (section 413), that affects the self-employment tax treatment from some small businesses and CPA firms that are set up at S Corporations and Limited Partnerships.

This provision would require that certain S Corporation owners, and Limited Partners would be subject to self-employment tax on their share of distributive profits in excess of salary/guaranteed payments for service.

The AICPA on June 9th, in response to this provision, sent a letter to the Senate Finance, and House Way and Means Committees, asking them to reconsider the proposal and also offering suggested changes. On June 14th, Senate Amendment 4342 was introduced to strike the proposal from the bill.  Also on the 14th, the AICPA sent letters to U.S. senators urging them to support the amendment.