HIRE Act Payroll Tax Exemption and Retention Credit


By George Adams

On March 18, 2010, the President signed the Hiring Incentive to Restore Employment (HIRE) Act into law. This act will exempt an employer from paying the employer portion of old-age, survivors and disability insurance (OASDI) taxes or railroad retirement taxes for the remainder of 2010 for new hires who are currently unemployed. In addition, employers can also claim a credit of up to $1,000 for retaining each of these new employees for at least one year.

A qualified employer is allowed an exemption for the employer portion of OASDI taxes related to a qualified individual's employment from the day after March 18 through December 31, 2010. A qualified individual is any individual who:

  • begins employment with a qualified employer after February 3, 2010, and before January 1, 2011;
  • certifies, by signed affidavit under penalties of perjury, that he/she has not been employed for more than 40 hours during the 60-day period ending on the date the employment with the qualified employer begins;
  • is not hired to replace another employee of the qualified employer, unless the other employee voluntarily quit or was fired with cause; and 
    is not related to the employer in a way that would make him or her ineligible for the work opportunity credit (Code Secs. 3111(d)(3) and 3221(c)(3), as added by the 2010 HIRE Act).

As indicated above, the qualified individual must certify that he/she has not been employed for more than 40 hours during the 60-day period ending on the date the employment begins with the qualified employer. This certification is obtained by having the employee complete and sign Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, under penalties of perjury.
Employers may begin to take this payroll tax exemption beginning with their 2010 2nd quarter Form 941 filing. The exemption is equal to 6.2% of the qualified employee's wages. Also, there is no limit to the amount of wages that the employee can earn to qualify for this exemption. It also appears that the period of employment (March 18-December 31, 2010) that qualifies for the payroll tax exemption also qualifies for the retention tax credit. Therefore, if a qualified individual was hired on April 1, 2010 and was employed until May 15, 2011, the employer would receive the payroll tax exemption from April 1, 2010 to December 31, 2010 equal to 6.2% of the qualified employee's wages, and then on April 1, 2011, the employer would receive the retention tax credit.

The retention credit is equal to the lesser of 6.2% of the retained worker's wages during the 52-week period or $1,000. Therefore, if the annual compensation is $16,130 or greater, the employer will receive the maximum $1,000 credit. This is a credit against income tax. For purposes of this act, a retained worker is a qualified individual (as defined above) who:

  • was employed by the qualified employer on any date during a tax year ending after March 18, 2010;
  • continued in that employment for a period of at least 52 consecutive weeks; and
  • earned wages during the last 26 weeks of that period equal to at least 80% of the wages for the first 26 weeks of the period (Act Sec. 102(b) of the 2010 HIRE Act).

For purposes of the related individual definition, an employer cannot claim the credit for employing related individuals, such as:

  • individuals who are related to the employer, to a shareholder who owns more than 50% of a corporate employer's stock or to an individual who owns more than 50% of the capital and profit interests in a noncorporate employer;
  • individuals who are dependents of the employer, or of a 50% shareholder in a corporate employer; and
  • individuals who are grantors, beneficiaries or fiduciaries (or dependents of grantors, beneficiaries or fiduciaries) of an employer that is an estate or trust (Code Sec. 51(i)(1)).

An employer hires a qualified individual on April 1, 2010. The individual's annual compensation is $50,000. The employer will receive a payroll tax exemption of $2,325 ($50,000/12X9X.062). Assuming the employee is retained through April 2011, the employer will also receive a $1,000 retention credit on April 1, 2011. Therefore, the total benefit to the employer for hiring the qualified individual is $3,325 related to this employee.

Employers who want to maximize the retention credit must consider several factors. First, the credit applies to both full-time and part-time workers. Therefore, an employer can hire two part-time employees versus one full-time employee and potentially receive a $2,000 retention credit, assuming the combined wages for the two employees are at least $32,260 and they are employed for at least 52 weeks. In addition, if employers wish to take advantage of the work opportunity credit instead of the payroll tax exemption/retention credit, they must opt out of the automatic payroll exemption in order to claim the work opportunity tax credit. If employers do not opt out of the payroll tax forgiveness, they cannot claim the work opportunity tax credit with respect to the qualified individual for one year after the individual's hire date.

The HIRE Act provides incentives to employ individuals who qualify under the act and certify that they have not been employed for more than 40 hours during the 60-day period ending on the date the employment with the qualified employer begins. This incentive is equal to 6.2% of the qualified employees' wages from March 18 to December 31, 2010. There is no wage limit under this act; however, employers are not subject to OASDI tax on wages in excess of $106,800, so no benefit is received when an employee's wages for the year exceed that limit. In addition, qualified employees who are either full-time or part-time and have been employed for 52 consecutive weeks qualify the employer to receive the retention credit of up to $1,000 per qualified employee.

Schneider Downs provides accountingtax, wealth management and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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