2010 Payroll Software- How Do Employers Qualify for a Tax Exemption

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Washington has recently enacted the HIRE Act (Hiring Incentives to Restore Employment). This new law includes two tax incentives for employers to hire workers who were previously unemployed or only working part time. The tax benefits apply to workers hired after February 3, 2010 and before January 1, 2011 and/ or for each worker employed for at least a year.

The first payroll tax credit (hire retention credit) applies in the case of workers employed for at least a year. Business owners may claim an additional tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

The second payroll tax exemption involves the employer's share of Social Security tax on qualified employees starting on wages paid on March 19, 2010. The employer will be exempt from their 6.2% Social Security tax through December 31, 2010. One note to employers the employee share of Social Security and Medicare taxes are not exempt as well as the employer portion of Medicare withholding.

Both taxable businesses and tax exempt organizations are considered qualified employers to claim the new tax exemptions. Employers in US territories that are subject to Social Security tax qualify for the new tax incentives. Federal, state and local government employers will most likely not qualify for the benefit however public universities and Indian Tribal governments do qualify. New businesses hiring employees for the first time also qualify for both payroll tax benefits under the new HIRE Act.

Employers may be eligible to claim both the HIRE Act benefits and WOTC (Work Opportunity Tax Credit) if this is the case the employer may only claim one tax benefit. Business owners who choose to claim the WOTC for a qualified employee may not apply the payroll tax exemption on wages paid to that employee from March 19, 2010, through December 31, 2010.

Employers taking the COBRA premium assistance credit, for employees that have been laid off, will qualify to claim that employee under the HIRE Act if the employee is rehired after February 3, 2010 and before January 1, 2011.


Business owners/ employers will be liable for any wrongly claimed exemptions. The employer will still be liable for their 6.2% Social Security withholding if they incorrectly claimed an exemption. In this situation the employer will be required to file Form 941 -X . The IRS will be updating the 2010 Form 941 for the second quarter Form 941 filing to take in account the new tax benefits put forth in the HIRE Act.

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