last update 5-1-2010
PAYROLL TAX EXEMPTIONS
Payroll Tax Exemption
The HIRE Act provides that a qualified employer is allowed an exemption from having to pay its
share of Social Security taxes, for a qualified individual's employment from March 19, 2010 through
December 31, 2010. The employee's share of Social Security taxes will still apply to the first
$106,800 of wages in 2010. In addition, the employer's and employee's shares of Medicare tax still
apply to all wages paid in 2010.
A qualified employer means any taxable business and tax-exempt organization.
The payroll tax exemption only applies to wages paid to a qualified employee performing services
in the employer's trade or business. Thus, the exemption does not apply to wages paid to household
For purposes of the payroll tax exemption (and retention credit), a qualified employee includes any
1. begins employment with the qualified employer after February 3, 2010, and before January 1,
2. certifies, by signed affidavit under penalties of perjury, 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
3. is not hired to replace another employee of the qualified employer, unless the other employee
voluntarily quit or was fired with cause; and
4. is not related to the employer in a way that would make him or her ineligible for the work
opportunity credit (i.e., employees who are related to the employer or who directly or indirectly own
more than 50 percent of the business).
The IRS has issued a new Form W-11 that employers may use to obtain a statement from an
employee, confirming the employee's unemployed status for purposes of the exemption and retention
credit. Employees must sign the form under penalties of perjury.
Employers are not required to use Form W-11 and may use a similar statement that provides the
same information. Form W-11 is not provided to the IRS.
The IRS notes that it is not necessary that an individual had been previously employed and lost his
or her job to be a qualified employee. The only requirement is that during the 60 days preceding the
start of employment, the individual must have been unemployed or employed for less than 40 hours
a week prior to being hired by the qualified employer. For this purpose, the 60-day period must be
continuous. Thus, it can span from 2009 into 2010. In addition, an individual who was in school for
some time during the 60 days preceding the start of employment (i.e., recent graduate) may still be
considered a qualified employee.
Because the payroll tax exemption is not limited to wages paid to qualified individuals who were
employed and lost their job, there is no requirement that the qualified employee must be a previously
laid-off employee of the employer. The qualified employee can be a previously laid-off employee
of the employer who is rehired, or a new hire.
Claiming the Payroll Tax Exemption
The payroll tax exemption is claimed on Form 941 beginning with the second quarter of 2010. A
draft version of Form 941 to be used by employers for the second quarter to claim the exemption has
been released by the IRS. The exemption (if any) for Social Security (or Railroad Retirement Act
tier 1 taxes) for wages paid from March 19, 2010, through March 31, 2010, must also be claimed on
the employer's Form 941 for the second quarter.
The IRS notes that an employer can claim the payroll tax exemption and the COBRA premium
assistance credit on the same Form 941 beginning with the second quarter of 2010.
The HIRE Act provides that the exemption for the employer's share of Social Security for wages
paid to a qualified employee applies automatically. A qualified employer that does not want to use
the payroll tax exemption must make an affirmative election out of the exemption, under procedures
to be provided by the IRS.
The IRS notes that if an employer applies the payroll tax exemption to wages paid to a qualified
employee, such wages paid to the employee during the one-year period beginning with the
employee's hiring date may not be taken into account for purposes of the work opportunity tax credit.
Thus, an employer that wants to claim the work opportunity tax credit for a qualified employee must
make an affirmative election out of the payroll tax exemption with respect to wages paid to that
The IRS has also answered some frequently asked questions (FAQs) on its web site at www.irs.gov
======================== WARNING =======================
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed. Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a
attorney to discuss the specific facts of your case
and the law of your state.
If you live in Louisiana and want to talk about your situation, please
call me at the number below. Fees will be charged after initial consultation.
Marvin E. Owen
3036 Brakley Drive
Baton Rouge, La 70816
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