When you hire someone, you and the employee each pay 6.2% Social Security tax on that employee’s wages (up to wages of $106,800 for 2010). Under the new tax law, wages paid to a qualified new employee for employment between March 19, 2010 and December 31, 2010 are exempt from the 6.2% employer portion of the Social Security tax.
Qualified New Employees are full-time or part-time workers who start work between February 4, 2010 and December 31, 2010 and who were not employed more than 40 hours during the 60-day period ending on their start dates. However, the new worker cannot replace another worker unless that person quits voluntarily or was discharged for cause (i.e., you can’t fire and then rehire all your employees to qualify for the exclusion).
If you have qualifying wages during March, you didn’t claim the exclusion on your 1st quarter Form 941s (because the law passed on March 18, and the tax forms weren’t revised to include the exclusion). You can claim the exclusion for Social Security taxes on qualifying new employees on your 2nd quarter Form 941.
The employee certifies on Form W-11 that he/she was not employed more than 40 hours during the 60-day period ending on his/her start date.
Example: On March 30, 2010 ABC Corp hires Joe, who has been unemployed for 70 days. ABC Corp pays Joe $15,000 wages between March 30, 2010 and December 31, 2010. Joe pays $930 Social Security tax on his wages. Normally, ABC Corp would match Joe’s Social Security tax, but under the new exclusion, ABC Corp does not have to match Joe’s $930 Social Security tax payment.
Credit for Retaining Qualified New Employees
Above and beyond the above credit, employers can also claim a temporary tax credit of up to $1,000 for wages paid to each qualified new employee (same definition as above). The worker must be kept on payroll for at least 52 consecutive weeks, and wages during the second 26 weeks must equal at least 80% of wages paid during the first 26 weeks. In other words, you can’t hire employees and then dramatically lower their hours/wages after a few months.
The credit equals the lesser of $1,000 or 6.2% of wages during the 52 weeks. The credit will be claimed on a business’ income tax return, and not its payroll tax return. Since the credit is not available until the tax year that a qualified employee has been on payroll for 52 weeks, the earliest you can claim the credit is on your 2011 income tax return.
Example: XYZ Corp hires Jane (a qualified new employee) on April 1, 2010 and Jane works until April 1, 2011. Jane has wages of $30,000 between April 1, 2010 and December 31, 2010. Jane has additional wages of $10,000 between January 1, 2011 and April 1, 2011.
XYZ Corp can claim a Social Security tax exemption on Jane’s $30,000 wages between April 1, 2010 and December 31, 2010. The exclusion amount is $1,860 ($30,000 * 6.2%).
Additionally, since Jane has been employed for more than 52 consecutive weeks, XYZ Corp is also entitled to a credit of $1,000 (equal to 6.2% of the wages during the 52 weeks ($30,000 plus $10,000, but limited to a maximum credit of $1,000 per qualified employee). Jane’s 52 week employment period ends in 2011, and XYZ Corp will claim the $1,000 tax credit on its 2011 tax return filed in early 2012.
Fine Print: This posting contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.