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Payroll Tax Holiday/Retention Tax Credit

March 25, 2010
Payroll Tax Holiday 

FICA tax forgiveness began on March 19, for “qualified employers” who hire a “qualified individual”  after February 3rd, 2010 and before January 1st, 2011.

A qualified employer is defined as any employer other than the government.

A qualified individual is defined as someone who “certifies by signed affidavit, under penalties of perjury, that such individual has not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment.”

In addition, a qualified individual cannot be “employed by the qualified employer to replace another employee of such employer unless such other employee separated from employment voluntarily or for cause."  An explanation provided by the Joint Committee on Taxation states that rehiring laid-off workers or filling positions of laid-off workers with new workers is permitted.

Lastly, a qualified individual cannot be a relative of the employer as defined in IRC section 51(i)1.

The law provides that employers may not claim FICA forgiveness for their qualified hires in the first quarter of 2010.  Instead, employers are required to accrue such tax saving for the first quarter and credit it toward their second quarter FICA taxes.

Treasury Regulations implementing the HIRE Act will be issued soon, but in the meantime employers may proceed by adhering to the text of the Act.

Until Treasury issues guidance implementing the new law, employers can establish their claim for the FICA forgiveness and employee retention credits as follows:

Employers should have each individual, for whom FICA forgiveness is claimed, complete a signed affidavit certifying, under penalties of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date of commencing employment; and

Employers should certify for each qualified individual they hire that:   (1) the individual is being hired to perform services in a trade or business of the employer; (2) the individual is not being employed to replace another employee unless such other employee separated voluntarily or for cause; and (3) the employer is in compliance with IRC section 51(i)1 regarding prohibition on hiring of relatives.

Employee Retention Tax Credit

To claim the Employee Retention Credit (ERC), employers must document:  (1) 52 consecutive weeks of employment with the employer by a qualified individual, and (2) wages during the last 26 weeks of employment being not less than 80 percent of wages during the first 26 weeks of employment. 

The ERC is $1,000 or 6.2 percent of wages paid to the employee over the 52-week period, whichever is less.  As a rule of thumb, if weekly wages average more than $310 over the period, ERC is $1,000.  If weekly wages average less than $310, ERC must be computed as .062 times total wages for the 52 weeks.

The ERC is an addition to the General Business Credit of IRC Section 38 and follows the rules of Section 38 with a single exception----any excess business credit resulting from the employee retention credit may not be carried back.  It may, however, be carried forward.

An employer may claim either the HIRE provisions or the Work Opportunity Tax Credit (WOTC), but not both.  Thus, individual companies must compare the tax benefits associated with the WOTC (maximum annual benefit of $2,400/worker) and the two HIRE provisions in determining which provides the superior tax benefit.