On May 6, 2010, the IRS posted additional frequently asked questions and answers (FAQs) on its webpage. There are three sets of FAQs:
- FAQs About the Payroll Tax Exemption and Qualified Employers
- FAQs About Qualified Employees
- FAQs About Claiming the Payroll Exemption
The FAQs clarify a number of questions. One question was whether the payroll tax exemption was based on when wages are earned or when they are paid to a qualified employee. The answer is that the payroll tax exemption is based on when the wages are paid. For example, if a qualified employee was paid on March 19, 2010, for wages earned for the two-week period beginning on Monday, March 8, 2010, and ending on Friday, March 19, 2010, the wages for that two-week period would qualify for the payroll tax exemption. This is the case even though the payroll tax exemption only applies to wages paid after March 18, 2010, and before January 1, 2011.
Employers can elect not to claim the payroll tax exemption. One reason for doing this might be to claim the Work Opportunity Tax Credit (WOTC) for an employee. (An employer can not claim the payroll tax exemption for an employee for whom it claims the WOTC.) The FAQs make it clear that the election can be made on an employee-by-employee basis, but the election applies to all wages paid to an employee; that is, the employer must decide for any one employee whether it will claim the payroll tax exemption or the WOTC for the wages paid.
The FAQs also confirm that there is a deadline for the employer to get the signed affidavit (e.g., Form W-11) from the employee. The employer must have the signed affidavit by the time the employer files an employment tax return applying the payroll tax exemption. If the employer obtains the signed affidavit from the qualified employee after wages are paid to the employee, the employer can still apply the payroll tax exemption to determine its liability on these wages. In some cases this may require the filing of a corrected return for a prior quarter.
The FAQs provide the following example:
An employer hires an otherwise qualified employee who begins employment on March 1, 2010 and is paid wages in March. The qualified employee does not provide the signed affidavit until April 15, 2010. The employer can claim the first quarter credit on the second quarter Form 941 for the amount of the exemption with respect to wages paid to the qualified employee from March 19, 2010 through March 31, 2010 and can apply the exemption to wages paid to the qualified employee starting April 1, 2010, despite the fact that the employee did not provide the signed affidavit until April 15, 2010.
In contrast, if the otherwise qualified employee does not provide the signed affidavit until August 1, 2010, the employer may not claim the first quarter credit on the second quarter Form 941 for wages paid to the qualified employee from March 19, 2010, through March 31, 2010, and cannot apply the exemption to wages paid in the second quarter because the employer did not obtain the signed affidavit by the time it filed its second quarter Form 941. Instead, the employer must file a Form 941-X to correct the second quarter of 2010 if it wants to claim the first quarter credit and apply the exemption to the second quarter wages paid to the qualified employee.
The FAQs also provide further guidance on completing the Form 941 to claim the payroll tax exemption.
On March 18, 2010, President Obama signed the HIRE Act into law, providing tax incentives for businesses hiring unemployed workers, and extending higher deduction limits for small businesses that make capital improvements. See HIRE Act Provides Tax Breaks for Hiring Unemployed Workers.
For additional information see IRS Issues Draft Form to Certify Qualified Employees Under HIRE Act, IRS to Issue Hire Act Final Form W-11 Week of April 5, and IRS Issues Revised Forms W-2 and W-3 for HIRE Act Changes.