IRS Posts Revised Form 941 and Instructions for Claiming New Hire Payroll Tax Exemption

On May 18, the IRS posted a new version of Form 941, Employer’s Quarterly Federal Tax Return, and its instructions for claiming the special payroll tax exemption that applies to new workers hired in 2010.

The Hiring Incentives to Restore Employment Act (HIRE Act) created a payroll tax exemption for employers who hire workers who have been unemployed for at least 60 days and who are not replacement hires. For qualifying new employees hired after February 3, 2010, and before January 1, 2011, an employer can claim an exemption equal to the employer’s share of Social Security taxes on wages paid in 2010 after March 19.

On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e (or on lines 12c through 12e for the exemption related to wages paid between March 19 and March 31). These lines ask for the number of qualified employees who were first paid exempt wages or tips in the quarter, the number of qualified employees who were paid exempt wages or tips in the quarter, and the amount of the wages and tips paid to qualified employees, which are multiplied by 0.062 (the amount of the employer’s share of Social Security tax). This amount is subtracted from the total Social Security and Medicare tax reported on line 5d.

The exemption for the employer’s share of Social Security taxes on wages paid to eligible employees between March 19 and March 31 is treated on the second quarter Form 941 as an April 1 tax deposit and does not adjust the amount of tax liability reported on lines 10 and 17.

The instructions say that an employer cannot claim the Social Security tax exemption and the work opportunity credit for the same employee. If an employer does not wish to claim the Social Security tax exemption for an eligible employee, the employer omits that employee and his or her wages from lines 6a through 6d (and lines 12c through 12e, if applicable).

To be a qualified employee for purposes of the payroll tax exemption, the employee must have signed Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, (or a similar statement) under penalties of perjury. The employee must not be a replacement hire, unless the worker being replaced separated from service voluntarily or for cause, and the employee cannot be related to the employer or to a 50% owner.