By LIZ BROADWAY, special to LTW

Editor’s note: Liz Broadway, a CPA, is Senior Tax Manager at Hughes Pittman & Gupton, LLP.

RALEIGH, N.C. – Small and large businesses alike are eligible for several thousand dollars in tax exemptions and credits to reduce the expense of adding employees. With the North Carolina economy making a slow upward turn, businesses are beginning to see new contracts and orders. The Employment Security Commission in mid-June announced that the state unemployment rate for May was 10.3 percent, down from April’s 10.8 percent.

Many business owners, executives and managers are considering the need for additional staffing to meet demand. To help ease the burden of adding employees, the federal government passed the that contains a payroll tax exemption and a tax credit for hiring in 2010.

The IRS has provided information about the payroll exemption (Fore more about the HIRE Act, )

This is in addition to the Work Opportunity Tax Credit that in 2009 was expanded to include additional target groups and hiring incentives.

Immediate Savings

As new employees are hired or furloughed employees return to work, quarterly federal payroll tax returns of businesses can reflect exemption of the employer’s 6.2 percent share of social security tax for wages paid after March 18, 2010 and before January 1, 2011 to qualified employees. To qualify for the exemption the employee:

• must have begun work after February 3, 2010
• does not replace another employee unless the employee separates employment voluntarily or for cause, including downsizing
• must have been unemployed or employed less than 40 hours during the 60-day period ending on the date the individual begins employment
• must sign an affidavit, under penalty of perjury, to their eligibility – The IRS has created form W-11 for this purpose,
• must not be related to the employer or own directly or indirectly more than 50% of the employer

The exemption includes the hiring of recent graduates, people who have never been employed and employees that were laid off and rehired. All positions are eligible, so part-time, temporary, and seasonal employees, as well as tipped food and beverage employees qualify. Temporary agencies are even eligible to claim the credit.

Act Fast

To claim the exemption on wages paid between March 19, 2010 and June 30, 2010 on the second quarter tax filing, the employee affidavit must be signed prior to filing the second quarter payroll tax return that is due by the July 31 filing date. To claim the exemption on first and second quarter wages where the affidavit is signed after the second quarter payroll tax return has been filed, a 941-X must be filed to amend the second quarter return.

Multiplying the Savings

The HIRE Act also includes a retention tax credit for those who remain employed for 52 consecutive weeks or longer.

Retention Tax Credit

• 6.2 percent of the employees annual wages or $1,000, which ever is less
• Claimed on the 2011 income tax return
• The credit cannot be carried back – applied to previous years tax returns, but can be carried forward
• The employee’s pay cannot decrease significantly in the second half of the year

The HIRE Act retention tax credit can be coupled with other tax credits including the Work Opportunity Tax Credit. In 2009, part of the American Recovery and Reinvestment Act included expansion of the WOTC. This credit can be as much as $9,000 for an eligible employee.

• The employee is identified as one of 12 target groups that include disconnected youth, unemployed veterans, Hurricane Katrina employees, SSI recipients, ex-felons, vocational rehabilitation referrals, 16-17-year-old summer youth, 18-39-year-old designated community residents, veterans, as well as long-term and other Temporary Assistance for Needy Families recipients
• Employer must request and receive certification from its state workforce agency
• Credit is 25 percent of the employee’s first-year wages for those working at least 120 hours but fewer than 400 hours
• Credit is 40 percent of the employee’s first-year wages for those working more than 400 hours
• Wages are capped based on the qualifying category
• Employers of long-term TANF recipients can receive a credit for the second-year of employment up to 50 percent of the employees wages

Two other ways to combine the HIRE Act exemption are the COBRA premium assistance credit and the Internal Revenue Code Section 45B credit for the employer portion of social security and Medicare taxes paid with respect to employee tips. To take advantage of any of these credits or exemptions, it is important to work with a qualified business tax professional or CPA. Acting swiftly can provide immediate savings by reducing the quarterly tax burden. Long term, combining exemptions and credits can save businesses thousands of dollars on each new employee hired this year.


The views expressed do not necessarily represent Hughes Pittman & Gupton, LLP or Hughes Pittman & Gupton, LLP policy and cannot be relied upon as accounting or tax advice. The outcome of any specific matter depends upon the specific facts and circumstances in which the matter arises. Check with a qualified adviser before taking any action.

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