The IRS has been busy issuing guidance on the provisions of the Hiring Incentives to Restore Employment (HIRE) Act, which temporarily suspends an employer's 6.2 percent OASDI tax paid for covered employees, and also provides a new worker tax credit. The IRS has not only recently updated its online frequently asked questions (FAQs) on claiming the payroll tax forgiveness credit, the agency also issued a revised Form 941, Employer's Quarterly Federal Tax Return, and instructions for claiming the this payroll tax exemption, applicable to qualified new hires in 2010. Further, the IRS's updated FAQs provide more explanations of covered employees and the affidavit requirement.

Covered employees
In general, employers cannot hire a covered employee to replace another employee. The IRS's revised instructions for Forms W-2, Wage and Tax Statement, and W-#, Transmittal of Wage and Tax Statements, provides an exception to this rule for covered employees hired to replace employees who voluntarily separated from employment or for cause (including downsizing).

Affidavit requirements
Covered employees must certify that they have been unemployed for the 60-day period immediately before beginning work or, alternatively, that they worked fewer than 40 hours for another employer during the 60-day period. The IRS issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, in April. Thus, employees must attest to two basic statements on the Form W-11.

The IRS's updated FAQs explain that employers must sign the affidavit before filing an employment tax return applying payroll tax forgiveness. If an employer obtains the signed affidavit from a qualified employee after paying wages to the employee, the employer can still apply the payroll tax exemption to determine its liability on these wages. Some cases, however, may require filing a corrected return for a prior quarter.

Updated Form 941
In late May, the IRS also posted a new version of Form 941, Employers Quarterly Federal Tax Return, and instructions, for claiming the payroll tax exemption. On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e. Employers will claim the exemption related to wages paid between March 19 and March 31 on lines 12C through 12e.

These lines ask the employer to report the number of qualified employees first paid exempt wages or tips during the quarter, the number of qualified employees who were paid exempt wages or tips during the quarter, and the amounts of wages and tips paid to qualified employees (which are multiplied by 0.062). The amounts are then subtracted from total Social Security and Medicare tax reported on line 5d.

The instructions also provide that employers cannot claim payroll tax forgiveness and the Work Opportunity Tax Credit (WOTC) for the same employee; employers must choose. 
  
If you have any questions, please contact your BC Engagement Executive or one of our tax partners below:  

Ronald J. Manse, CPA
Corporate Tax & Succession Planning

Scott T. Warburton, CPA/PFS
Corporate, Individual & Estate Tax Planning

Gregory F. McNulty III, CPA, JD
Individual Tax & Estate Planning

David L. Groves, CPA
Corporate & International Tax Planning

Daniel R. Riemenschneider, CPA, CMA
Corporate & Individual Tax Planning