Employment: IRS Clarifies Interruption in Employment's Effect on Hire Act's Payroll Exemption

11.01.10

Under the Hiring Incentives to Restore Employment Act, known as the HIRE Act, employers have until December 31, 2010 to hire new employees and get two valuable tax incentives:

1. An exemption from 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; and

2. A $1,000 per employee federal income tax credit.

The payroll tax relief applies only to wages from March 19, 2010, to December 31, 2010. For the employer to also claim a tax credit, the worker must remain employed for 52 consecutive weeks and his or her wages during the last 26 weeks must equal at least 80% of his or her wages for the first 26 weeks. The credit amount is the lesser of $1,000 or 6.2% of his or her wages during the 52-week period.

Until recently, it was unclear as to the effect of a temporary absence by a "qualified employee." The IRS has recently clarified this situation. Whether an individual may still qualify following a temporary absence, depends on the following analysis:

Short Term/Temporary Interruption. The IRS ruled in Information Letter 2010-0198 that someone who is already a qualified employee who experiences a short term or temporary interruption in work continues to be a qualified employee unless the interruption constitutes a termination of employment. Whether a short term or temporary interruption of an employee's performance of services constitutes a termination depends on the facts and circumstances. If the individual's employment is terminated, he will have to (again) meet qualified employee status requirements when rehired. See HIRE Act: Questions and Answers for Employers.

Former Employees. For a former employee to qualify for the payroll exemption, his former employment must be considered terminated so he can begin employment after February 3, 2010 and before January 1, 2011. In addition, he must be employed for less than 40 hours during the prior 60 days. The former employee cannot re-qualify unless he hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer.

To qualify, a hire must:

1. Commence employment after February 3, 2010 and before January
1, 2011;

2. Certify on Form W-11 that he or she has not been employed with the
qualified employer for more than 40 hours during the 60-day period
ending when employment begins;

3. Not replace another employee unless the employee left voluntarily
or for cause; and

4. Not be related to the employer.

HIRE Act: Questions and Answers for Employers

By Jeffrey C. Rambach, jrambach@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
litigation and counsels clients regarding everyday employment matters. 

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