Payroll tax exemption, credit available

Before you file your second-quarter payroll tax reports with the IRS you should be aware of a tax credit that may save your company money.

The Hiring Incentives to Restore Employment Act (HIRE Act) signed into law on March 18, 2010, provides a tax incentive for hiring and retaining new workers. The act provides an exemption for the Social Security taxes paid on qualified new hires and a credit for keeping them on the payroll for at least 52 consecutive weeks.

If you have hired any new employees since Feb. 3, 2010, who are not related to you and did not work more than 40 hours in the 60 days prior to coming to work for you, your company can receive an exemption from having to pay its 6.2 percent portion of the Social Security Tax of those qualified employee's wages between March 19, 2010 and Dec. 31, 2010. This could potentially save a company up to $6,621 per employee based on the Social Security wage cap of $106,800 for 2010. This exemption applies to both for-profit and not-for-profit companies. Qualified employees must not have been hired to displace a current employee, unless that employee was separated from employment voluntarily or for cause. Additionally, employees who are related to the employer or who directly or indirectly own more than 50 percent of the business are not eligible.

The HIRE Act exemption can be claimed on your company's Form 941 (Employer's Quarterly Federal Tax Return) for any qualified employees who you paid wages to (or reported tips on) after March 19, 2010. The credit is equal to the 6.2 percent tax imposed on the qualified employee's wages and tips. You can take the exemption for wages paid in the second quarter of 2010 and a credit for those wages paid in the first quarter of 2010 on your Form 941, which is due on or before July 31. The exemption and credit applies to the employer's tax liability only and expires for wages paid after December 31, 2010.

In addition, employers who have hired employees that qualify for the payroll tax exemptions above, and keep those employees on the payroll for at least 52 weeks, may be eligible for a tax credit equal to the lesser of $1,000 or 6.2 percent of the wages paid to the qualified employee during a consecutive 52-week period. In effect, any qualified employee who earns more than $16,129 during the 52-consecutive-week period would qualify the employer for the full $1,000 credit. This retained worker credit is claimed and taken on the employer's federal income tax return rather than on the quarterly payroll tax returns, as the payroll tax exemption above is. In addition, since the retained workers credit is based on a consecutive-52-week prerequisite, most employers will not be able to claim the retained workers credit until they file their federal income tax returns for 2011.

Be sure and take advantage of the payroll tax exemption before it expires and keep track of your new hires in order to take the retained workers credit if they qualify.

Scott Fields is a certified public accountant with Kohn Colodny LLP in Carson City. Contact him at 885-9136 or scottd@kohncolodny.com