Friday, February 18, 2011

IRS Issues Final Version Of New Hire Retention Credit Form

IRS has issued the final version of Form 5884-B, New Hire Retention Credit, for use by employers to compute their credit for retained workers. The retention credit was enacted by the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147).

Observation: The Form itself is unchanged from the draft version issued in December of 2010.

Background. The HIRE Act carried two valuable incentives for employers that boosted payroll in 2010: a payroll (FICA) tax exemption for employers that hire unemployed workers; and an up-to-$1,000 tax credit for keeping such new hires on the payroll for at least one year.

Under Code Sec. 3111(d), qualified employers were exempted from paying the employer's 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to a newly hired “qualified individual” (defined below). The payroll tax relief applied only for wages paid to qualified individuals from the period beginning on Mar. 19, 2010 (the day after the HIRE Act was signed into law by the President) and ending on Dec. 31, 2010.

A qualified employer is any employer other than the U.S., a state, or a political subdivision of a state (i.e., a local government, or an instrumentality). (Code Sec. 3111(d)(2)(A)) However, a public institution of higher education is a qualified employer even though it is a government instrumentality. (Code Sec. 3111(d)(2)(B))

A qualified individual is one who:

(1) begins employment with the employer after Feb. 3, 2010, and before Jan. 1, 2011;

(2) certifies by signed affidavit, under penalties of perjury, that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer (use Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, or its equivalent);

(3) does not replace another employee of the employer (unless that other employee left voluntarily or for cause); and

(4) is not related to the qualified employer in a way that would disqualify the individual for the work opportunity tax credit (WOTC) under Code Sec. 51(i)(1). (Code Sec. 3111(d)(3))

In addition to the payroll tax exemption, HIRE Act Sec. 102 provides employers with an up-to-$1,000 tax credit for retaining “qualified individuals” as defined for purposes of the employer payroll tax holiday under Code Sec. 3111(d) purposes. The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period. The amount of the credit per eligible employee is the lesser of $1,000 or 6.2% of wages (as defined for income tax withholding purposes) paid by the employer to the qualified employee during the 52-week consecutive period. The portion of the general business credit attributable to the new hire retention credit cannot be carried back to a tax year that begins before Mar. 18, 2010.

Observation: The amount of the credit is essentially capped at $1,000 for workers who receive wages during the 52-week period of more than $16,129.03. ($16,129.03 ×.062 = $1,000)

The new hire retention credit is claimed on the employer's income tax return (not the employer's employment tax return). The credit may be claimed for a retained worker in the first tax year ending after Mar. 18, 2010, for which the retained worker satisfies the 52-consecutive-week requirement. However, since retained workers must be qualified individuals, the credit applies only for workers hired after Feb. 3, 2010, and before Jan. 1, 2011.

Observation: For employers filing calendar year income tax returns, the retention credit will be claimed on the employer's 2011 income tax return.

New form. Form 5884-B requires employers to enter each worker's Social Security number, the date the worker began employment, the worker's wages during the first 26 weeks of consecutive employment, and the worker's wages during the second 26 weeks of consecutive employment. This information is used to determine the employer's eligibility for, and to calculate the amount of, the credit.

References: For the HIRE Act's new hire retention credit, see FTC 2d/FIN ¶L-15217; United States Tax Reporter ¶384.05; TaxDesk ¶380,521; TG ¶14761.

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