Independent Contractor Compliance Blog - by Collabrus™

WASHINGTON DC-The IRS announced two new tax benefits available to employers hiring workers who were previously unemployed or only working part time. These provisions are part of the Hiring Incentives to Restore Employment (HIRE) Act enacted into law last week.

The first tax credit

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) can qualify for a 6.2-percent payroll tax incentive, as an offset from their share of Social Security taxes on wages paid to these workers. This reduced tax withholding will have no effect on the employee’s future Social Security benefits. Employers will still be required to pay their share of Medicare taxes.

The employees must still pay all their share of taxes

Employers are still required to withhold from the employee’s wages:

• The employee’s 6.2-percent share of Social Security taxes,
• Medicare,
• Personal income taxes.

The second tax credit

In addition, for each worker retained for at least a year businesses may claim an additional general business tax credit (up to $1,000 per worker) when they file their 2011 income tax returns.

The credits are designed to get businesses to expand the number of employees they have.

“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.

Who qualifies?

Commercial businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees.

Household employers cannot claim this tax benefit.

There are some conditions to qualify

To qualify for the tax benefits:

• The new hire must be an added position to the payroll.
• New hires filling existing positions only qualify if the workers they are replacing left voluntarily or were terminated for good cause.
• Family members and other relatives do not qualify.
• The employer must get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work, or worked less than a total of 40 hours for someone else during the 60-day period.

(The IRS reports it is developing a form for employees to use to make the required statement).

How will the credit be claimed?

Employers will claim the payroll tax benefit on the federal quarterly employment tax return they file with the IRS beginning the second quarter of 2010. The IRS states that revised forms and further details on these two new tax provisions will be coming in the next few weeks.