Have you added a previously unemployed person to your payroll and wonder how to claim the payroll tax holiday associated with hiring that person?
You need to fill out Form W-11 (pdf), the Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, which the IRS has made available on its Web site. Newly hired employees should use the form to confirm that they are “qualified” employees under the HIRE Act.
When they fill out the form, employees are confirming that they began employment after February 3, 2010, and before January 1, 2011; have not been employed for more than 40 hours during the 60-day period ending on the date they begin employment with the employer seeking the HIRE Act benefits; are not being employed to replace another employee unless the other employee separated from employment voluntarily or for cause (including downsizing); and are not related to the employer seeking the tax benefit.
Interestingly, employers do not need to send these statements to the IRS to claim the payroll tax exemption and the new hire retention credit. Rather they must retain these forms with their other payroll and income tax records.
Most eligible employers then use Form 941, Employer’s Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form, revised for use beginning with the second calendar quarter of 2010, is currently posted as a draft form on www.IRS.gov and will be released next month as a final along with the form’s instructions.
The HIRE Act created two new tax benefits designed to encourage employers to hire and retain new workers. As a result, employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of social security tax on wages paid to these workers after March 18. This reduction will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. In addition, for each unemployed worker retained for at least a year, businesses may claim a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.
These two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify for either of these tax incentives.