New HIRE Act Tax Breaks for Employers Complying with the Qualification and Documentation Rules for Hiring Unemployed Workers

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1 presents New HIRE Act Tax Breaks for Employers Complying with the Qualification and Documentation Rules for Hiring Unemployed Workers A Live 110-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: Ali Master, National Director of Business Incentives and Tax Credit Services, Ernst & Young, Dallas Cody Villella, Senior Tax Associate, National Tax Group, RSM McGladrey, Vienna, Va. Peter Kulick, Member, Dickinson Wright, Lansing, Mich. Thursday, June 3, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions ed to registrations.

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4 New HIRE Act Tax Breaks For Employers Webinar June 3, 2010 Cody Villella, RSM McGladrey Ali Master, Ernst & Young Peter Kulick, Dickinson Wright

5 Today s Program Tax Incentives For Employment In The HIRE Act Slides 6-43 (Cody Villella and Ali Master) Compliance And Documentation Requirements Slides (Peter Kulick and Ali Master) 5

6 Tax Incentives For Employment In The HIRE Act Cody Villella, RSM McGladrey Ali Master, Ernst & Young

7 Tax incentives For Employment In The HIRE Act - Overview On March 18, President Obama signed the Hiring Incentives to Restore Employment (HIRE) Act, which had been passed by the Senate 68 to 29 on March 17 and the House by 217 to 201 on March 4. The two most important provisions of the HIRE Act are a limited payroll tax holiday provision and a tax credit provision, both of which provide companies with incentives to hire unemployed workers in Other provisions include enhanced expense treatment for new equipment placed into service in 2010, extended eligibility for tax credit bond issuers, and increased funding to highway and transit programs, The HIRE Act also creates new anti-offshore tax abuse measures and delays the implementation of worldwide allocation of interest. 7

8 HIRE Act Guidance The IRS has issued additional guidance in the form of frequently asked questions (FAQs) and updated forms 941 and W-11. The FAQs address many subjects, including the scope of the exemption, how it interacts with other tax breaks, and when an employer must receive the employee s certification of former unemployment status. Form 941 is available at: Form W-11 is available at: 8

9 FAQs The frequently asked questions are organized as follows: FAQs About the Payroll Tax Exemption and Qualified Employers, are organized as QR 1 through 8. They are available at: FAQs About Qualified Employees, are organized as QE 1 through 18. They are available at: FAQs About Claiming the Payroll Exemption, are aeoga organized edas PE 1 through 25. They are available at: 9

10 FICA Taxes The Federal Insurance Contributions Act (FICA) imposes two taxes: the old age, survivors and disability insurance (OASDI) tax and the Medicare hospital insurance (HI) tax. FICA taxes are imposed on employers on wages paid with respect to employment and on employees on wages received with respect to employment. The OASDI tax rate is 6.2% on wages up to an annually-adjusted wage base ($106,800 for 2010). The HI tax rate is 1.45% on all wages, regardless ess of amount. Under pre-hire Act law, there was no payroll tax forgiveness for employers that hired unemployed workers. 10

11 Employment Covered By FICA Employment covered by FICA includes the following services, unless a specific exemption applies: Services performed within the U.S. by an employee for an employer, regardless of the citizenship i or residence of either party Services performed on or in connection with a U.S vessel or aircraft, regardless of the citizenship or residence of either the employer or the employee, but only if one of the following also takes place: The services are performed under a contract of employment which h is entered into within the U.S., or During the performance of the contract and while the employee is employed on the vessel or aircraft, the vessel or aircraft touches at a port within the U.S. 11

12 Employment Covered By FICA (Cont.) Services performed outside the U.S. by a citizen or resident of the U.S. as an employee of an American employer Services that are designated as employment or equivalent to employment under an international totalization agreement under 42 USC 433 Services by religious organization employees Employment covered by FICA include the following services, even if one of the specific exemptions (see Slide 11) would otherwise apply: Services performed by an individual as a member of a uniformed service on active duty or as a member of a uniformed service on inactive duty training Services as a Peace Corps volunteer 12

13 FICA Exemptions Certain types of employment are exempted from FICA, including: Employment of certain foreign agricultural employees Student employment Certain government employment Employment by international organizations Employment of certain nonimmigrant aliens Employment of family members Employment in religious service Employment by certain exempt organizations Railroad employment Employment in Communist organizations Certain fishing crew employment Employment as a real estate agent or direct seller 13

14 HIRE Act Sect. 101 Under Sect. 101of the HIRE Act, the employer portion of OASDI does not apply to wages paid by a qualified employer to a qualified individual during the period beginning on March 19, 2010 and ending on Dec. 31, 2010 for services performed (Code Sect. 3111(d)(1) ): In a trade or business of the qualified employer (Code Sect. 3111(d)(1)(A) ); or, For a qualified employer that is tax-exempt under Code Sect. 501(a), in furtherance of the activities related to the purpose or function on which the employer s exemption is based. (Code Sect. 3111(d)(1)(B) ) FAQ PE7 clarifies that the exemption is based on when wages are paid and not when they are earned. 14

15 HIRE Act Sect. 101 (Cont.) The payroll tax holiday applies only to the 6.2% OASDI portion of the employer stax. It doesn't apply to the 1.45% Medicare (HI) portion of the employer s tax It doesn t apply to any part of the employee stax tax. It doesn t apply to the self-employment tax paid by self-employed individuals. 15

16 Limits There is no stated limit on the total amount of an employer s OASDI tax that may be forgiven. However, the amount of tax forgiven for any employee can t exceed $6,621.60, because the OASDI tax applies to only the first $106,800 of wages paid in 2010 ($106, % = $6,621.60). An employee need not work for a minimum number of hours in order for the employer to qualify for the payroll tax holiday. Thus, the holiday is available for wages paid to part-time employees. The payroll tax holiday ends for wages paid after Dec. 31, Thus, hiring an unemployed worker earlier in the year will increase the tax saving. 16

17 Examples Example 1: On April 1, 2010, a qualified employer hires a qualified individual earning $100,000 per year. The employee continues working for the employer for the rest of 2010 (three-quarters of the year). The payroll tax holiday will save the employer $4,650 in OASDI tax ($100,000 ¾ 6.2%). Example 2: If the same individual were hired on July 1, 2010, and worked for the eemployer for the rest of (one-half of the eyea year), the tax saving would be $3,100 ($100,000 ½ 6.2%). 17

18 Definition Of Qualified Employer The term qualified employer means any employer other than the U.S., a state, a political subdivision of a state, or an instrumentality of the above. (Code Sect. 3111(d)(2)(A) ) However, a public institution of higher education, as defined in Sect. 101(b) of the Higher Education Act of 1965, is a qualified employer even though it is a government instrumentality. (Code Sect. 3111(d)(2)(B) ) Thus, the payroll tax holiday applies to employers in the private and not-for-profit sectors. It doesn t apply to public-sector employers other than public institutions of higher education. 18

19 Definition Of Qualified Individual The term qualified individual means an individual who (Code Sect. 3111(d)(3) ) : Begins employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011 (Code Sect. 3111(d)(3)(A) ) Certifies that he hasn t been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment (Code Sect. 3111(d)(3)(B) ) Under FAQ QE3, the 60-day period must be continuous and can span Isn t employed dto replace another employee unless the separation was voluntary or for cause; and (Code Sect. 3111(d)(3)(C) ) Isn t related to the qualified employer in a way that would disqualify him for the WOTC (Code Sect. 3111(d)(3)(D) ) 19

20 Definition Of Qualified Individual (Cont.) Although a qualified employee who begins work after Feb. 3, 2010 can be eligible for the payroll tax holiday, the employer s OASDI tax will be forgiven only for the wages paid after March 18, Certification i must occur on an affidavit i signed under penalty of perjury. Under FAQ QE6, an employer may qualify for hiring a qualified individual id to replace an employee who was terminated ddue to lack of work available. When work becomes available, the holiday can be claimed both for rehiring old workers and for hiring new workers. Under FAQ QR5, if an employee laid off in 2009 has been receiving i COBRA premium assistance, for which the employer has been taking the COBRA premium assistance credit, and the employer rehires the employee, the employer takes the payroll tax exemption. 20

21 Qualified Individual FAQs Under FAQ QE8, if an employer hires a recent graduate who has been in school for some or all of the 60 days preceding the start of his employment, the payroll tax exemption applies. It is not necessary that the individual was previously employed and has lost his or her job. Under FAQ QE9, a qualified employee does not have to work a set number of hours or weeks to qualify. Under FAQ QE10, the is no minimum age for qualified employees. 21

22 Related Parties There is no payroll tax holiday for hiring the qualified employer s: Son, daughter, or descendant of either Stepson or stepdaughter Brother, sister, stepbrother or stepsister Father, mother, or ancestor of either Stepfather or stepmother Son or daughter of brother or sister Brother or sister of father or mother Son-in-law, daughter-in-law, father-in-law, mother-in-law, brotherin-law or sister-in-law 22

23 Related Parties If the qualified employer is a corporation, the holiday will not apply to an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% (in value) of the corporations outstanding stock (applying the Code Sec. 267(c) attribution rules). If the qualified employer is a non-corporate entity, the holiday will not apply to an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% of the capital and profits interest. If the qualified employer is an estate or trust, the holiday will not apply to a grantor, beneficiary or fiduciary of the estate or trust; or an individual having any of the familial relationships described above to a grantor, beneficiary, or fiduciary of the estate or trust. 23

24 Related Parties (Cont.) An individual unrelated to the qualified employer who is the employer s dependent and is a member of the employer s household won t qualify. If the qualified employer is a corporation or an individual who is a dependent of anyone who owns, directly or indirectly, more than 50% in value of the outstanding stock, it or he won t qualify. A dependent of a grantor, beneficiary or fiduciary of an estate or trust that is a qualified employer won t qualify. 24

25 Wages Paid In 1Q2010 The payroll tax holiday doesn t apply for wages paid during the first calendar quarter of (Code Sect. 3111(d)(5)(A) ) Instead, the amount by which the qualified employer s OASDI tax for wages paid during the first calendar quarter of 2010 would have been reduced if the payroll tax holiday had been in effect for that quarter is treated as a payment against the qualified employer s OASDI tax for the second calendar quarter of (Code Sect. 3111(d)(5)(B) ) The payment is treated as made on the date when the employer s second-quarter OASDI tax is due. (Code Sect. 3111(d)(5)(B) ) 25

26 1Q2010 Example A qualified employer hires a qualified individual on Feb. 14, Because the payroll tax holiday doesn t apply for the first calendar quarter of 2010, the employer must pay the regular OASDI tax on wages paid to the employee in that quarter. However, the employer s OASDI tax on the employee s first-quarter wages after March 18, 2010 is treated as a payment against the employer s OASDI tax for the second calendar quarter of

27 Election Out A qualified employer may elect not to have the payroll tax holiday apply. (Code Sect. 3111(d)(4) ) FAQ PE8 provides that no formal election is required to forego the exemption; rather, the employer must report and pay its normal share of Social Security tax on wages paid to qualified employees. However, under PE10, if an employer applied the exemption on Form 941 for one or more prior quarters, it can later elect out of the exemption by filing Form 941-X. Under PE9, an employer can choose to apply the exemption with respect to none, some or all of its qualified employees. However, if the employer applies the exemption for any wages paid to a particular employee, the exemption must be applied to all wages paid to that employee from March 19, 2010, through Dec. 31,

28 Interaction Of Work Opportunity Tax Credit With HIRE Act An employer must select between claiming the WOTC or the payroll tax exemption for an employee. HR 2847 Title I, Sect. 101 (b) states: The term wages shall not include any amount paid or incurred to a qualified individual during the 1-year period beginning on the hiring date of such individual by a qualified employer unless such qualified employer makes an election not to have section 3111(d) apply. This in an individual- by-individual election. No such preclusion is required ed for the retention e credit. 28

29 Interaction Of Work Opportunity Tax Credit With HIRE Act (Cont.) The employer has to carefully analyze several factors before selecting the optimum benefit. For most target groups, WOTC is 25% of the first $6,000 once the employee works at least 120, but fewer than 400, hours. Then, the calculation moves retroactively to 40% of the first $6,000. The maximum benefit is $2,400. Taxpayers must evaluate this benefit vs. the exemption that is 6.2% of the wages. For lower-wage jobs, you may be better off claiming the WOTC. An annualized wage of ~ $48,000 is where your 6.2% starts to rise above the WOTC. 29

30 WOTC Overlap Challenges The amount of overlap between the two program depends on your industry and workforce mix. In some cases, initially, as many as 40% of all hires may be dual- eligible. WOTC can only be claimed on certified hires, and state workforce agencies (SWAs) are running six to nine months behind in issuing WOTC certifications. The net overlap rate, where someone is ultimately certified for WOTC and works the minimum 120 hours, is much smaller than the initial overlap. Employers will need to track the dual-eligible tranche of HIRE Act hires separately, so that they can select the maximum benefit. 30

31 WOTC Overlap Implications In order to maximize the benefit, employers will likely have to wait until the WOTC answer (certification or denial) is received from the SWAs before claiming the payroll tax exemption. 941X for the relevant quarters would have to be filed for any such employees. For hires hired later in calendar 2010, the WOTC status closure would likely not be reached until after the filing of fourth QTR 941 and the issuance of the W-2 Form. A revised W2C would need to be filed to correct the tax exempt wages box on the W2. 31

32 Job Retention Tax Credit The HIRE Act also provides a retention credit equal to the lesser of $1,000 per retained employee or 6.2% of the qualifying employee s wages. The employer may claim the credit for employees who: Qualify for the HIRE Act payroll tax exemption, Remain with the taxpayer employer for no less than 52 consecutive weeks, AND Receive during the second 26 weeks of their employment at least 80% of the wages paid to them in the first 26 weeks. Employers may claim the WOTC and the retention credit on the same qualified employee. 32

33 Job Retention Tax Credit (Cont.) Sect. 102 (a) states an employer can claim this credit on any taxable year ending after the date of the enactment of this act (3/18/10). However, practically speaking, the IRS is stating that this credit is going to be for the 2011 tax return. Since the retention has to be measured for the 52-week period, most taxpayers will claim this on their 2011 return. Part of the general business credit is determined under Sect. 38(b) of the IRC (Form 3800). 33

34 Job Retention Tax Credit (Cont.) One-year carryback and 20-year carryforward Does not offset AMT Unlike WOTC, there is no 280C limitation mentioned for this credit. A $1,000 WOTC is really ~ $650, since the taxpayer must forego its deduction on the employee wages by the amount of the credit. A $1,000 retention tax credit is $1,

35 State-Level Jobs Bills = Enacted new incentive = Introduced recent legislation WA CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI IN KY OH WV NY PA MD VA ME VT NH MA RI CT NJ DE DC TN NC AZ NM OK AR SC MS AL GA AK TX LA HI FL 35

36 Alabama Tax Incentive Example H.B. 260 (Reemployment Act of 2010), effective April 22, 2010 Employers can receive up to 50% of the gross wages paid to qualified employees 50% for wages of $14 per hour and above 40% for wages between $12 and $14 per hour 35% for wages between $10 and $12 per hour No deduction for wages less than $10 per hour or if the employee works fewer than 37.5 hours per week Qualified employees are: Individuals collecting unemployment, or Individuals whose unemployment benefits have expired. Qualified employees must be retained for 12 months for the employer to claim the deduction Applicable for wages paid in tax years 2011 and

37 Sect. 179 Expensing Subject to certain limits, taxpayers can elect to treat the cost of any Sect. 179 property placed in service during the tax year as an expense which is not chargeable to capital account. Such cost can be deducted for the tax year in which the property is placed in service. Under special rules for tax years beginning in 2008 and 2009, the deductible Code Sect. 179 expense could not exceed $250,000, and the maximum deductible expense had to be reduced by the amount by which the cost of Sect. 179 property placed in service during tax year 2008 or 2009 exceeded $800,000. These amounts were not adjusted for inflation. 37

38 Sect. 179 Expensing (Cont.) Under pre-hire Act law, for tax years beginning in 2010, the deductible Code Sect. 179 expense could not exceed $125,000, and the maximum deductible expense had to be reduced by the amount by which the cost of Sect. 179 property placed in service during the 2010 tax year exceeded $500,000. These amounts were adjusted for inflation. For 2010, the inflationadjusted amounts equaled ed $134,000 and $530,000, respectively. 38

39 Sect. 179 Example In 2010, T, a calendar-year taxpayer, places into service Sect. 179 property with a cost of $660,000. Under pre-2010 HIRE Act law, T could elect to expense $4,000: $134,000 (maximum expense for 2010) $130,000 (the amount by which the cost of Sect. 179 property placed in service, $660,000, exceeded the beginning-of-phase-out amount for 2010, 0, $530,000). 39

40 Sect. 179 Expensing (Cont.) For tax years beginning after 2010, the deductible Sect. 179 expense cannot exceed $25,000, the beginning-of-phase-out out amount is $200,000, and neither amount is adjusted for inflation. Qualifying property for purposes of the Sect. 179 expensing election is depreciable tangible personal property purchased for use in the active conduct of a trade or business, including off-the-shelf computer software placed in service in tax years beginning g before e

41 Enhanced Sect. 179 Expensing The HIRE Act provides that, for tax years beginning after 2007 and before 2011: The dollar limitation on the Sect. 179 expense deduction is $250,000. (Code Sect. 179(b)(1)) The reduction in the dollar limitation starts at $800,000 (Code Sect. 179(b)(2)), and Neither amount is adjusted for inflation. (Code Sect. 179(b)(5)) The special increase in dollar limitation it ti amounts and no-inflationadjustment rule for 2008 and 2009 are removed. (Code Sect. 179(b)(7)) 41

42 Enhanced Sect. 179 Expensing (Cont.) Since the $250,000 and $800,000 limitation amounts and no-inflationadjustment rule applied under pre-hire Act law for tax years beginning in 2008 and 2009, the HIRE Act both extends those limitation and phase-out amounts to tax years beginning in 2010 and eliminates the inflation-adjustment rule that applied for tax years beginning in For example, A, a calendar-year taxpayer, places into service in 2010 Sect. 179 property with a cost of $660,000. A can elect to expense $250,000: $250,000 (maximum expense for 2010) $0 (the amount by which the cost of Sect. 179 property placed in service during 2010, $660,000, exceeds the beginning-of-phase-out amount for 2010, $800,000). 42

43 Enhanced Sect. 179 Expensing (Cont.) For property placed in service in tax years beginning in 2010, the Sect. 179 deduction phases out completely when the cost of the property exceeds $1,050,000 ($800,000 (beginning-of-phase-out amount) + $250,000 (dollar limitation)). This is the same limit on Sect. 179 expensing that applied under pre- HIRE Act law for property placed in service in 2008 or The lower deduction ($25,000) and phase-out thresholds ($200,000) 000) will take effect in

44 Compliance And Documentation Requirements Peter Kulick, Dickinson Wright Peter Kulick, Dickinson Wright Ali Master, Ernst & Young

45 Reporting Issues And Practical Considerations: W-2 Reporting And 941-X W-2 reporting obligations An employer is required to report the wages of a qualified employee that are exempt from the employer s share of Social Security tax. PE25 (IRS May 6, 2010 FAQ About Claiming the Payroll Exemption). A new Code CC has been created for box 12 of Form W-2 for employers to identify qualified employees and report the amount of wages and tips covered by the payroll tax exemption. Practical considerations Suppose that an employee does not timely certify that he is a qualified employee? Suppose an employer that previously claimed the credit now wants to elect out? Suppose an employer fails to timely claim the credit on Form 941? 45

46 Reporting Issues And Practical Considerations: W-2 Reporting And 941-X (Cont.) Late employee certification solutions Employee must certify qualified employee status prior to employer claiming the credit (see QE16). QE17 (IRS May 6, 2010 FAQ About Qualified Employees) solution: File a Form 41-X once you receive employee certification. Electing out after the fact Once an employer applies the exemption to any 2010 wages paid to a qualified employee, the employer must apply the exemption to all 2010 wages paid (see PE9). But, an employer can later elect out of the exemption by filing Form 941-X (see PE10). Failing to claim exemption and the 941-X No guidance on point, but FAQ suggest a solution file the 941-X for the missed quarter to claim the credit and not as an offset against subsequent quarter payments Analogy to an employee s late certification and electing out of exemption

47 Payroll/HR Considerations Increased administrative burden An infrastructure must exist to self-screen, track, follow up on, and coordinate with the payroll tax department on filings for potentially thousands of employees. Train. Each hiring location and hiring manager must be trained on new program and distribution procedures/forms/ supplies. Timing is important Employers must screen and capture the documentation before the employee departs. Applicable to all new hires who started with the employer between Feb. 4, 2010 and Dec. 31, Wages paid on or after March 19 (day after enactment) through Dec. 31, 2010 will count. 47

48 Payroll/HR Considerations (Cont.) Increased compliance burden Employers need to ensure that they coordinate with their payroll provider or payroll department to flag qualified employee wages to correct file Form 941. Employers may claim the benefit by adjusting their tax deposits. However, most will claim quarterly. The qualified employee must complete the Form W-11 self attestation form. If the W-11 Form is late (i.e., post-quarterly 941 filing), then a 941X Form must be filed for the correct quarter in order to secure a refund. 48

49 Form 941 Detail Q1 exemption to be claimed with Q2 941 (due date 7/30/10) Lines required 6a: Number of qualified employees paid this QTR 6b: Total number of qualified employees paid 6c: Wages/tips paid to this QTR x. 062 = exemption Q1 lines 12c: Number of qualified employees paid wages/tips March 19-March 31 And 12d: Wages and tips paid 3/19 to 3/31 X.062 IRS may issue further Schedule B instructions. 49

50 Payroll/HR Considerations (Cont.) Self-attestations require tracking, follow-up and scanning (for storage). The W-11 form does not need to be mailed in or attached to the 941. However, an IRS auditor may want to review the form upon audit. If WOTC is claimed, then both have to be tracked to determine optimal benefit. Retention has to be evaluated, including the second six-month period rule for each person. Vacant position must meet requirements to qualify. 3111(d)(3)(C) requirement is that the employee cannot be replacing someone, unless the person left voluntarily or was terminated for cause. 50

51 Qualified Employee Affidavit HIRE Act expressly mandates that an employee certify his status as a qualified employee. See IRC 3111(d). Certification contours: Employee must attest, under penalties of perjury, that he: 1) Has not been employed more than 60 hours 2) During the 60-day period ending on the date he began employment. IRS released a new form, W-11, that can be used for employee certification. W-11 is not required to be used;employers employers can self- design an employee affidavit. 51

52 Qualified Employee Affidavit it (Cont.) Best practices 1. Do not file the employee affidavit with the IRS. Rather, employer should maintain it as part of federal tax recordkeeping obligations. 2. Have employees sign and return the affidavit as soon as they start employment. An employer cannot claim the tax exemption until it receives an employee affidavit. See QE16 & QE17 (May 6, 2010 IRS FAQ About Qualified Employees). ) 52

53 Claiming Credit For 1st Quarter Wages An employee must begin employment after Feb. 3, 2010 to be a qualified employee. The credit is available for wages paid between March 19 and Dec. 31, Claim the credit for wages paid during the March 19-31, 2010 period on Form 941 for the second quarter. Procedural aspects Line 12c Enter number of qualified employees paid in the March period Line 12d Enter exempt wages paid in the March period Line 12e Multiply Line 12e amount by

54 Seasonal And Temporary Workers Credit can be claimed for seasonal and temporary employees if the employees meet the definition of a qualified employee. PE12 (IRS May 6, 2010 FAQ About Claiming the Payroll Exemption) offers guidance for seasonal employers If not otherwise required to file a quarterly Form 941, file for that quarter anyway y For first quarter wages (March period), file a second quarter Form 941 Will receive a credit against liability for future quarters or receive a cash refund Use Form 941-X for missed quarters 54

55 Qualified Employees Defined A qualified employee is a person who: 1. Began employment after Feb. 3, 2010 and before Jan. 1, Certified that t has not been employed more than 40 hours during the 60-day period ending on date began employment 3. Does not replace another employee, unless prior employee voluntarily terminated or terminated for cause; and 4. Is not a related person to the employer March 20, 2010 IRS FAQ 60-day period must be continuous and can span Exemption available for certain rehired employees Recently hired graduates in school during the 60-day period can satisfy the definition of qualified employee.

56 Rehires IRS FAQs QE5: Does the payroll tax exemption apply to wages paid to an employee who was previously laid off and then rehired by the same or a related employer after a 60-day period? A-QE5: Yes, an employer may apply the payroll tax exemption to wages paid to a rehired employee who is otherwise a qualified employee. QE6: If an employer lays an employee off because of lack of work and later, when work picks up, hires a new employee, can the payroll tax exemption apply to wages paid to the new employee? A-QE6: Yes, if the new employee is a qualified employee (i.e., was employed for less than 40 hours during the prior 60 days). 56

57 Electronic signature IRS FAQs (Cont.) QE18: May Form W-11 (or a similar form containing the same information as the Form W-11) be transmitted electronically and signed by way of electronic signature? A-QE18: Yes, employers may obtain signed Forms W-11 (or similar forms containing the same information) electronically. The electronic system generating the form must transmit the same information as the Form W-11, must ensure that the information transmitted and received is the information sent, and must document all occasions of user access that result in the transmission. 57

58 Evaluating Benefit Potential Multiple key factors will affect the size of both your benefits. These include: Your industry The number of new hires you hire in 2010 When you hire these individuals The wages you pay them between 3/19/10 and 12/31/10 The turnover rate of your business Consistency of the employment When you start screening for the HIRE Act How well your hiring managers comply with the process 58

59 The Unemployed For 60 days Target Group 9.7% unemployed 14,000,000 61% US workforce 154,000,000 unemployed >10 weeks Target group population: 8,700,000 Note: These statistics were based on March 2010 data and are approximates of actual numbers.

60 Sample Payroll Tax Exemption Calculation Food processor hires 1,200 people in 2010 at rate of 100 per month, and has a turnover rate of 50%. Average annual salary is $2,000 per month, and the average W-2 wage is $7,500 Starts screening for HIRE Act on July 1, 2010 Hires from 2/4/10 to 6/30/10: 500, with 300 still remaining on payroll ( retro hires ) Retro hires are screened, and 35% (105) complete W-11 with a yes to the unemployed question and submit their form to the company. Hires from 7/1/10 to 12/31/10 (600 hires) are screened, and 90% of them complete the W-11 and 35% of them are found eligible (189). Total qualified hires: 294* Estimated Exemption: 294 x $7,500 x 6.2% = $136,710 *We are assuming that all hires were replacing individuals who left the company voluntarily and not subject to Sec 51(i)(1). 60

61 Sample Retention Tax Credit (Same Company) Number of qualified hires with completed W-11 forms on-hand: 294 Percentage staying employed for 12 months: 50%, or 147 Assuming they were employed for 52 consecutive weeks and earned at least 80% of what they did in their first six months, they would all be qualified for the retention tax credit. Average annual wage: $2,000 x 12 = $24,000 Credit is lesser of $1,000 or 6.2% of 12 months of wages. Must be done on an individual-by-individual basis We assume here they all earned over $16,129, which gives you $1,000 (6.2% x $16,129). Estimated retention tax credit: $1,000 x 147 = $147,000 Total HIRE Act Value: $136,710 + $147,000 = $283,710 61

62 45B Tax Credits And HIRE Act Certain food and beverage establishments can claim a credit under IRC 45B for Social Security and Medicare taxes paid or incurred by the employer on certain employee tips, referred to as the 45B credit. An employer could be eligible for both the payroll tax exemption and the 45B credit on certain tips, if the employer has tipped employees who are also qualified employees under the HIRE Act. The payroll exemption is taken on the employer s Form 941, and the 45B credit is taken on the employer s income tax return. The payroll tax exemption applies to all wages paid to a qualified employee, unless the employer elects out of the payroll py tax exemption with respect to the employee. An employer that applies the payroll tax exemption with respect to a qualified employee will be entitled to a smaller 45B credit because the employer will pay only Medicare tax (and not Social Security tax) on the employee s wages, including reported tips. In general, since IRC 45B only applies to wages paid above the minimum wage, the employer is better off claiming the payroll exemption on the wages first and then claiming only the Medicare portion for the Tip credit. 62