IRS clarifies HIRE Act

Good news for employers who are bringing workers back after layoffs: The IRS says you may be exempt from paying Social Security (FICA) taxes on those workers after all. This surprising interpretation is contained in a series of FAQs posted by the agency to clarify the recently enacted Hiring Incentives to Restore Employment (HIRE) Act (HR 2847). As explained in our Alert on March 19, 2010, you can qualify for relief from Social Security taxes on newly hired workers if the following statements are true:

• The worker begins employment after February 3, 2010 and before January 1, 2011.

• You have the worker sign an affidavit, under penalty of perjury, that he or she has not been employed for more than 40 hours during the 60-day period before becoming employed with you.
• The worker isn’t replacing another employee, unless the prior employee quit or was fired for cause.
• The worker isn’t a relative of the owner.

Here’s the surprising part: The IRS says if you rehire an employee more than 60 days after a layoff, the individual may be a qualified worker, as long as he or she meets the tests above. They take the same approach if you laid off someone in the past and then hired a new person when business picks up. 

Tips: The IRS doesn’t specify whether recalling a worker from a layoff after 60 days would be considered equivalent to rehiring the worker for purposes of the HIRE Act. Based on the agency’s generous interpretation so far, we’re guessing the answer is yes, but you should check with your tax adviser before taking any action.

One note of caution: It has come to our attention that the IRS’s interpretation of the time frame that qualifying new hires’ paychecks are exempt from Social Security withholding may be overly generous. The IRS’s FAQs indicate that the exemption applies to “all wages paid to qualified employees from March 19, 2010…through December 31, 2010.” However, the statute says it applies “to wages paid by a qualified employer with respect to employment during the period beginning on [March 19, 2010] and ending on December 31, 2010….” Technically, we believe this means that the exemption applies to pay for actual work performed beginning on March 19. You would still have to pay the tax for work performed before that date. Again, consult your tax adviser.

The IRS says it is working on a model affidavit for employers. In the meantime, you can ask your Vigilant staff representative for sample language. If the IRS’s model turns out to be significantly different, then you should ask the individual to sign a revised copy.