Payroll Tax Holiday and Retention Credit for Hiring Unemployed Workers

If your organization is one of the lucky ones looking to add staff, consider this:

Payroll Tax Forgiveness.   To help stimulate the hiring of workers by the private sector, the new law exempts any private-sector (meaning non-governmental) employer that hires a worker who had been unemployed for at least 60 days from having to pay the employer’s 6.2% share of the Social Security payroll tax on that employee for the remainder of 2010. A company could save a maximum of $6,621 if it hires  an unemployed worker and pays that worker at least $106,800—the maximum amount of wages subject to Social Security taxes—by the end of the year. The benefit is available to both for-profit businesses and non-profit organizations.

Retention Bonus.   As an additional incentive, for any qualifying worker hired that the employer keeps on payroll for a 52 continuous weeks, the employer is eligible for an additional non-refundable tax credit of up to $1,000 after the 52-week threshold is reached, to be taken on their 2011 tax return. In order to be eligible, the employee’s pay in the second 26-week period must be at least 80% of the pay in the first 26-week period. This credit is the lesser of $1,000 or 6.2% of the wages paid by the taxpayer to the retained worker during the 52-consecutive-week period. Thus, the credit for a retained worker will be $1,000 if, disregarding rounding, the retained worker’s wages during the 52-consecutive-week period exceed $16,129.03. However, the credit isn’t available for pay not treated as wages under the Code (e.g., remuneration paid to domestic workers).

Effective Date.   Workers hired after the date of introduction of the legislation (Feb. 3, 2010) are eligible for the payroll tax forgiveness and the retention bonus, but only wages paid after March 18 receive the exemption for payroll taxes.

Additional Features.   Some additional features of the new hiring incentive include:

  • The tax benefit of the new incentive is immediate. It puts money into an organization’s cash flow immediately, since the tax is simply not collected in the first place.
  • A worker who replaces another employee who performed the same job for the employer isn’t eligible for the benefit, unless the prior employee left the job voluntarily or for cause.
  • The tax benefit generally applies only to private-sector employment, including nonprofit organizations—government jobs are generally not eligible for either benefit. However, employment by a public higher education institution qualifies.
  • There is no minimum weekly number of hours that the new employee must work for the employer to be eligible, and there is no limit on the dollar amount of payroll taxes per employer that may be forgiven.
  • For workers that would otherwise be eligible for the Work Opportunity Tax Credit (i.e., another type of employment tax credit), the employer must select one benefit or the other for 2010. There is no double dipping.
  • An employer can’t claim the new tax breaks for hiring family members.
  • For the hiring to qualify, the new hire must sign an affidavit, under penalties of perjury, stating that he or she hasn’t been employed for more than 40 hours during the 60-day period ending on the date the employment begins.
  • The incentive isn’t biased towards either low-wage or high-wage workers. Under the measure, a business saves 6.2% on both a $40,000 worker and a $90,000 worker.
  • The payroll tax holiday doesn’t apply with respect to wages paid during the first calendar quarter of 2010, but the amount by which the Social Security payroll tax would have been reduced under the payroll tax holiday provision during the fist calendar quarter is applied against the tax imposed on the employer for the second calendar quarter of 2010.

One Response to Payroll Tax Holiday and Retention Credit for Hiring Unemployed Workers

  1. Wow, this is really helpful for small nonprofit owners like me. It’s good to see that there is a payroll holiday for companies that do some good! We are definitely looking to add staff, so I’m glad the government is looking out for nonprofits!

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