Payroll Tax Exemption FAQ’s
Thursday, August 12th, 2010FAQs About the Payroll Tax Exemption and Qualified Employers
QR1: What is the payroll tax exemption?
A-QR1: The payroll tax exemption is an exemption from the employer’s 6.2 percent share of social security tax on all
wages paid to qualified employees from March 19, 2010 (the day after the date of enactment of the HIRE Act) through December 31, 2010. The employee’s 6.2 percent share of social security tax and the employer and employee’s shares of Medicare tax still apply to all wages.
QR2: Which employers qualify for the payroll tax exemption?
A-QR2: Taxable businesses and tax-exempt organizations qualify for the payroll tax exemption. Such employers in
U.S. territories (i.e., American Samoa, Commonwealth of Northern Mariana Islands, Guam, the U.S. Virgin Islands andPuerto Rico) that are subject to federal social security tax also qualify for the payroll tax exemption. Federal, State or local government employers generally do not qualify for the payroll tax exemption. However, public colleges and universities can qualify for the exemption. Indian tribal governments also qualify for the exemption.
QR3: Does the payroll tax exemption apply to household employers?
A-QR3: No. The payroll tax exemption applies only to wages paid to a qualified employee performing services in the
employer’s trade or business or in activities in furtherance of a tax-exempt organization’s exempt purpose.
QR4: If an employer starts a new business, does the payroll tax exemption apply to wages paid to employees hired for the new business?
A-QR4: Yes, if they are qualified employees.
QR5: If an employee laid off in 2009 has been receiving COBRA premium assistance, for which the employer has been taking the COBRA premium assistance credit, and the employer rehires the employee, can the employer take the payroll tax exemption under the HIRE Act for wages paid to the employee?
A-QR5: Yes, if the employee is a qualified employee.
QR6: Can a qualified employer both apply the payroll tax exemption and claim the work opportunity tax credit (WOTC) for the same employee?
A-QR6: No, an employer may either apply the payroll tax exemption or claim the WOTC for an employee, but not
both. An employer that wishes to claim the WOTC for a qualified employee may not apply the payroll tax exemption
with respect to any wages paid to that employee from March 19, 2010, through December 31, 2010.
QR7: If an employer applies the exemption to wages paid to a nonqualified employee, is the employer liable for the amount of employer social security tax on wages previously reported as exempt?
A-QR7: Yes, the employer is liable for the amount of employer social security tax on wages it erroneously reported as exempt, because the exemption is only applicable to wages paid to qualified employees. The employer must file Form 941-X for each prior quarter for which the exemption was erroneously applied.
QR8: How does application of the payroll tax exemption to wages paid to restaurant employees affect the 45B credit?
A-QR8: Certain food and beverage establishments can claim a credit under section 45B of the Internal Revenue Code
for social security and Medicare taxes paid or incurred by the employer on certain employee tips, referred to as the
“45B credit.” An employer could be eligible for both the payroll tax exemption and the 45B credit on certain tips if the employer has tipped employees who are also qualified employees under the HIRE Act. The payroll exemption is taken on the employer’s Form 941 and the 45B credit is taken on the employer’s income tax return. The payroll tax exemption applies to all wages paid to a qualified employee unless the employer elects out of the payroll tax exemption with respect to the employee. An employer that applies the payroll tax exemption with respect to a qualified employee will be entitled to a smaller 45B credit because the employer will pay only Medicare tax (and not social security tax) on the employee’s wages, including reported tips.
QR9: Some businesses use the services of workers who are employees of a temporary agency. Can the temporary agency claim the payroll tax exemption for its qualified employee working at a client business?
A-QR9: The temporary agency can apply the exemption with respect to wages paid to a qualified employee of the
temporary agency. This is determined based on when the employee begins employment with the temporary agency,
and not based on when the employee begins work at a client business of the temporary agency.
QR10: If a client business hires an employee who previously provided services to the business as an employee of a temporary agency, is the client business entitled to apply the payroll tax exemption?
A-QR10: The client business can apply the exemption if the worker is a qualified employee when he or she begins
employment with the client as its employee. That is, the worker must not have worked as an employee for any
business (including the temporary agency) for more than 40 hours in the 60 days prior to beginning employment with the client business.
) QR11: Does the payroll tax exemption apply for purposes of the Railroad Retirement Tax Act (RRTA)?
A-QR11: Yes, the payroll tax exemption applies with respect to a qualified employer’s liability for the portion of the Tier 1 tax under RRTA that corresponds to social security tax.
References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for Employers
FAQs About Qualified Employees
QE1: Who are qualified employees?
A-QE1: Qualified employees are individuals who begin employment with a qualified employer after February 3, 2010,
and before January 1, 2011, who have been unemployed or employed for 40 hours or less during the 60-day period
ending on the date such employment begins, who are not employed by the qualified employer to replace another
employee of that employer, unless the other employee separated from employment voluntarily or was terminated for cause, and who are not family members of or related in certain other ways to the employer.
QE2: Do the qualified employees need to do anything to make it possible for their employer to claim the payroll tax exemption?
A-QE2: Yes, qualified employees must certify by a signed affidavit, under penalties of perjury, that they have not been employed for more than 40 hours during the 60-day period ending on the date they started employment. The IRS plans to issue a model affidavit that can be used for this purpose.
QE3: Is the 60-day period continuous, and can it span 2009-2010?
A-QE3: The 60-day period must be continuous and can span 2009-2010.
QE4: Does the payroll tax exemption apply to wages paid to an otherwise qualified employee hired to replace an existing worker whose employment terminated?
A-QE4: The payroll tax exemption does not apply to wages paid to an employee who is hired to replace an existing
worker, unless the existing worker terminated employment voluntarily or was terminated for cause.
QE5: Does the payroll tax exemption apply to wages paid to an employee who was previously laid off and then rehired by the same or a related employer after a 60-day period?
A-QE5: Yes, an employer may apply the payroll tax exemption to wages paid to a rehired employee who is otherwise
a qualified employee.
QE6: If an employer lays an employee off because of lack of work and later, when work picks up, hires a new employee, can the payroll tax exemption apply to wages paid to the new employee?
A-QE6: Yes, if the new employee is a qualified employee (i.e., was employed for less than 40 hours during the prior
60 days).
QE7: Does the payroll tax exemption apply only if the employer previously laid employees off?
A-QE7: No, the payroll tax exemption can apply to wages paid to any qualified employee.
QE8: If an employer hires a recent graduate who has been in school for some or all of the 60 days preceding the start of his employment, does the payroll tax exemption apply to wages paid to the employee?
A-QE8: Yes, if the employee is a qualified employee. It is not necessary that the individual was previously employed
and has lost his or her job to be a qualified employee.
QE9: Does the qualified employee have to work a set period of time for the employer to be eligible for the exemption?
A-QE9: No. Application of the payroll tax exemption does not require that a qualified employee be employed for a set
number of hours or a set number of weeks.
QE10: Is there a minimum age for qualified employees? Will high school summer hires and interns be considered eligible employees?
A-QE10: There is no minimum age requirement to be a qualified employee.
QE11: Can employers create their own affidavit or must they use IRS Form W-11?
A-QE11: Employers can use their own affidavit as long as it includes the same information as IRS Form W-11, Hiring
Incentives to Restore Employment (HIRE) Act Employee Affidavit, and is signed under penalties of perjury.
QE12: Must the signed affidavit (e.g., Form W-11) be notarized?
A-QE12: No
QE13: Should employers send signed employee affidavits, such as Form W-11, to the IRS?
A-QE13: No, the employer does not file or send signed employee affidavits to the IRS. The employer should retain
these affidavits with other payroll and income tax records.
QE14: Can an employer apply the payroll tax exemption even if an employee fails to sign an employee affidavit, such as Form W-11?
A-QE14: No. An employer can only apply the exemption on wages paid to a qualified employee. In order to be a
qualified employee, among other requirements, the employee must sign an employee affidavit such as Form W-11.
QE15: Is there a deadline for the employer to get the signed affidavit from the employee?
A-QE15: Yes, 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.
For 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.
QE16: May Form W-11 (or a similar form containing the same information as the Form W-11) be transmitted electronically and signed by way of electronic signature?
A-QE16: Yes, employers may obtain signed Forms W-11 (or similar forms containing the same information)
electronically. The electronic system generating the form must transmit the same information as the Form W-11, must ensure that the information transmitted and received is the information sent, and must document all occasions of user access that result in the transmission. The electronic transmission must be signed by way of an electronic signature by the employee whose name is on the Form W–11 and the signature must be made under penalties of perjury. The perjury statement must contain the language that appears on the paper Form W–11. The electronic system must inform the employee whose name is on the Form W–11 that the employee must make the declaration contained in the perjury statement and that the declaration is made by signing the Form W–11. The instructions and the language of the perjury statement must immediately follow the employee’s statements and immediately precede the employee’s electronic signature. The electronic signature must be the final entry in the employee’s Form W–11 submission. The act of the electronic signature must be made by the employee whose name is on the electronic Form W–11, and the signature must also authenticate and verify the submission, by making reasonably certain that the person accessing the system and submitting the form is the employee identified on the Form W-11. Upon request by the Internal Revenue Service during an examination, the employer must supply a hard copy of the electronic Form W–11, and a statement that, to the best of the employer’s knowledge, the electronic Form W–11 was made by the employee whose name is on the form. The hard copy of the electronic Form W-11 must provide exactly the same information as, but need not be a facsimile of, the paper Form W–11.
QE17: When does an individual “begin employment” for purposes of the HIRE Act?
A-QE17: The HIRE Act does not address when an individual begins employment; therefore, general principles relating to employment apply. Under these general principles, employment includes the establishment, maintenance, and termination of the employer-employee relationship, all of which depend on the facts and circumstances. Accordingly, an individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is first established. In the case of an individual who was previously employed by the qualified employer and whose employment was terminated, for purposes of determining qualified employee status, the individual begins employment on the date when, based on the facts and circumstances of the particular situation, the employer-employee relationship is reestablished.
QE18: Can an employee who has been on furlough, standby status or temporary layoff be a qualified employee when he or she resumes active status?
A-QE18: An individual in this circumstance can be treated as a qualified employee only if the furlough, standby status, or temporary layoff constitutes a termination of employment and, upon reestablishment of the employment
relationship, the requirements to be a qualified employee are satisfied. Whether the employment relationship has
terminated is based on facts and circumstances. See QE17, above, for a determination of when employment begins.
QE19: Does work performed as a self-employed individual count in determining whether an individual has been employed for 40 hours or less during the 60-day period ending on the date the individual begins employment for purposes of qualified employee status?
A-QE19: No. Only work performed as an employee counts in determining whether an individual has been employed
for 40 hours or less during the 60-day period.
QE20: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual who terminated employment voluntarily?
A-QE20: Yes, as long as the employee is otherwise a qualified employee.
QE21: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to gross misconduct?
A-QE21: Yes, as long as the employee is otherwise a qualified employee.
QE22: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was terminated due to poor performance?
A-QE22: Yes, as long as the employee is otherwise a qualified employee.
QE23: Does the payroll tax exemption apply to wages paid to an employee hired to replace an individual whose employment was previously terminated in a reduction in force due to lack of work?
A-QE23: Yes, as long as the employee is otherwise a qualified employee. In addition, the payroll tax exemption can
apply to an employee whose employment was previously terminated in a reduction in force due to lack of work, and
who is later rehired, as long as the rehired employee is otherwise a qualified employee.
QE24: Can a minor sign a HIRE Act employee affidavit, such as Form W-11, which is required to be
signed under penalties of perjury?
A-QE24: Yes.
References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for Employers
FAQs About Claiming the Payroll Exemption
PE1: How does the employer claim the payroll tax exemption for wages paid to qualified employees?
A-PE1: The payroll tax exemption is claimed on Form 941, Employer’s QUARTERLY Federal Tax Return, beginning
with the second quarter of 2010.
PE2: How does the employer claim the payroll tax exemption for wages paid to qualified employees during the period March 19 through March 31, 2010 (the first quarter of 2010)?
A-PE2: The payroll tax exemption for wages paid during this period will be claimed on the employer’s Form 941 for the second quarter of 2010.
PE3: Can an employer claim the COBRA premium assistance credit and the payroll tax exemption for new hires on the same employment tax return?
A-PE3: Yes.
PE4: How does application of the payroll tax exemption to wages paid to a qualified employee affect the availability of the Work Opportunity Tax Credit with respect to that employee?
A-PE4: If an employer applies the payroll tax exemption to wages paid to a qualified employee, such wages paid to
the employee during the one-year period beginning with the employee’s hiring date may not be taken into account for purposes of the Work Opportunity Tax Credit. An employer that wishes to claim the Work Opportunity Tax Credit with respect to a qualified employee can elect out of the payroll tax exemption with respect to wages paid to that qualified employee.
PE5: What is the significance of Feb. 3, 2010, and March 19, 2010, under the HIRE Act?
A-PE5: An employee must begin employment after Feb. 3, 2010, and before Jan. 1, 2011 in order to be a qualified
employee. The payroll tax exemption applies to wages paid to the qualified employee from March 19, 2010 (the day
after the date of enactment) through December 31, 2010.
PE6: How does the social security wage base affect the payroll tax exemption?
A-PE6: The exemption is applicable to wages that would otherwise be subject to the employer’s share of social
security tax (i.e., wages up to the social security wage base) that are paid to qualified employees from March 19,
2010, through December 31, 2010. The employer is still liable for the employer share of Medicare tax on all wages
and for withholding both the qualified employee’s share of social security tax on wages up to the social security wage
base ($106,800 for 2010) and Medicare tax on all wages.
PE7: Is the payroll tax exemption based on when wages are earned by a qualified employee or when they are paid to a qualified employee?
A-PE7: The exemption is based on when wages are paid. Thus, only wages paid from March 19, 2010, through
December 31, 2010, qualify for the exemption (regardless of when those wages are earned). PE8: The HIRE Act allows qualified employers to elect out of the exemption. How is this done?
A-PE8: To elect out of the payroll tax exemption, the employer simply reports and pays the employer share of social
security tax on wages paid to qualified employees, along with the employee share of social security tax, Medicare
taxes, and withheld income tax. In other words, an employer does not need to specifically state that it is electing out of the exemption.
PE9: Does an employer have to choose to apply the payroll tax exemption with respect to all of its qualified employees?
A-PE9: No, the employer can choose to apply the exemption with respect to none, some, or all of its qualified
employees. However, if the employer applies the exemption with respect to any wages paid to a particular qualified
employee, the exemption must be applied to all wages paid to that employee from March 19, 2010, through December 31, 2010.
PE10: If an employer properly applies the payroll tax exemption on Form 941 for one or more prior quarters for a qualified employee who, as a certified member of a targeted group, also qualifies the employer for the work opportunity tax credit (WOTC), can the employer later elect out of the exemption, so it can instead claim the WOTC?
A-PE10: Yes, if an employer applied the payroll tax exemption for a qualified employee on Form 941 for one or more
prior quarters, the employer can later elect out of the exemption by filing Form 941-X for each affected prior quarter to correct its original return and pay the employer’s share of social security tax for each such prior quarter. The employer is then eligible to claim the WOTC on its income tax return.
PE11: How will employers claim the payroll tax exemption for wages paid to qualified employees from March 19, 2010, through March 31, 2010?
A-PE11: The payroll tax exemption that would be applicable to wages paid during the first quarter of 2010 cannot be
applied on the first quarter Form 941. Instead, the amount by which the employer’s social security tax would have
been reduced as a result of applying the exemption to wages paid during the first quarter is treated as a payment for
the second quarter. The credit for this payment may be claimed only on the second quarter Form 941 (lines 12c-12e)
and may only be claimed with respect to wages paid to qualified employees from March 19, 2010 (the day after the
date of enactment), through March 31, 2010. A seasonal employer that does not otherwise have to file Form 941 for
the second quarter must file Form 941 for that quarter in order to claim credit for the amount of the exemption that
would have applied to wages paid during the first quarter. The amount of the credit claimed on Form 941 for the
second quarter will be refunded to the employer or may be applied against a liability for a later quarter.
PE12: How will the IRS treat the credit claimed for wages paid in the first quarter?
A-PE12: The IRS will treat the credit as a deposit made on the first day of the second quarter for quarterly payroll tax
return filers.
PE13: What line on the revised Form 941 reflects qualified employees who begin employment in late March but are not paid until April? What line on Form 941 would reflect qualified employees paid wages and tips covered by the payroll tax exemption in March?
A-PE13: If a qualified employee begins employment in late March, but the employer does not pay the employee until
April, the employer will include the employee in the number reported on both lines 6a and 6b of the second quarter
Form 941 and will include wages paid to the qualified employee in the second quarter on line 6c. If a qualified
employee receives wages during the period of March 19 through March 31, the employer will include the qualified
employee on line 12c of the second quarter Form 941 and will include the wages paid in such period on line 12d.
PE14: If an employer does not apply the payroll tax exemption with respect to a qualified employee, is the employee still counted on lines 6a and 6b (or line 12c for 1st quarter) as a Qualified Employee?
A-PE14: The employer reports on lines 6a and 6b (or line 12c for 1st quarter) only qualified employees with respect towhom the employer is applying the payroll tax exemption. Similarly, the employer reports only wages paid to qualified employees to whom the exemption is applied on line 6c (or line 12d for 1st quarter).
A-PE15: Yes, line 6b is cumulative for qualified employees with respect to whose wages the employer is applying the
payroll tax exemption in that quarter. For example, if an employer hires 30 qualified employees in March, 30 in April, 30 in May, and 30 in June and applies the payroll tax exemption with respect to wages paid to all of the qualified employees in the second quarter, Line 6b would show 120 employees on the second quarter return.
PE16: Must employers apply the payroll tax exemption on the return for the quarter they paid the related wages, or can they apply it on a return for a later or earlier quarter?
A-PE16: Employers must apply the exemption on the return for the quarter in which they paid the related wages.
PE17: If the Form 941 liability is below $100,000 solely due to application of the payroll tax exemption, does the employer still need to make the deposit the next day?
A-PE17: No, if application of the payroll tax exemption to wages paid to qualified employees results in the liability
being below $100,000, the employer will not have a next-day deposit requirement. Instead, the employer will deposit based on its regular deposit schedule.
PE18: How will the employer report the payroll tax exemption on Schedule B? Does an employer reduce the liability reported and its deposits in the second, third, and fourth quarters of 2010 to account for the payroll tax exemption?
A-PE18: The employer will not separately report the payroll tax exemption or the first quarter credit on Schedule B.
An employer’s report of its liability for the second, third and fourth quarters of 2010 on Schedule B will reflect the
reduction in liability due to application of the payroll tax exemption to wages paid to qualified employees during those quarters. Since the payroll tax exemption reduces an employer’s liability on wages paid to qualified employees, the employer is not required to deposit the employer’s 6.2 percent share of social security tax on such wages. In addition, since the payroll tax exemption does not apply to the first quarter and the first quarter credit must be claimed on the second quarter return, an employer may reduce its deposits for the second quarter by the amount of the first quarter credit.
PE19: When will updated forms be available (e.g., Forms 941, 943, 944, 941-X)?
A-PE19: The IRS has revised the Form 941 for the second quarter of 2010 and a draft of the revised form is available
on IRS.gov. The IRS is in the process of updating Forms 943, 944 and 941-X.
PE20: When will the updated Form 94X Schema be available?
A-PE20: The IRS development of the 94X Schema is pending the finalized Form 941. The IRS anticipates it will be
available in May.
PE21: Will the IRS revise Form 941again in the third and fourth quarters to remove lines 12 (c) and 12(d)?
A-PE21: The IRS will not revise Form 941 for the third and fourth quarters of 2010. Employers will be directed by the
form and the instructions to leave those lines blank on the returns they file for the 3rd and 4th quarters.
PE22: Since there will be changes to the electronic filing schemas for employment tax returns such as the Form 941, will electronic filers need to recertify for all applications with the IRS?
A-PE22: No.
PE23: How will the payroll tax exemption affect the breakout amounts on EFTPS?
A-PE23: There will be no changes to the EFTPS system as a result of the payroll tax exemption. When an employer
makes EFTPS deposits, the employer should continue to enter amounts of Medicare tax, social security tax, and
income tax withholding, taking into account the reduction in liability due to the payroll tax exemption and, for the
second quarter, the credit for first quarter amounts.
PE24: Will employers have to indicate on the Form W-2 the qualified employees whose wages are exempt from the employers share of social security tax and/or separately report wages exempt from the employers share of social security tax?
A-PE24: Yes, new Code CC has been created for box 12 of Form W-2 for employers to identify qualified employees
and report the amount of wages and tips covered by the payroll tax exemption. In addition, new box 12b has been
created on Form W-3 to report the aggregate of Code CC.
PE25: Must an employer that uses a reporting agent provide the reporting agent with copies of Forms W-11 obtained from qualified employees?
A-PE25: No, the employer is not required to provide copies of Form W-11 to its reporting agent. There are no specific
procedures for employers that use reporting agents related to the payroll tax exemption. The employer is liable for
reporting and paying the correct payroll tax, including proper application of the payroll tax exemption, regardless of
whether the employer uses a reporting agent.
References/Related Topics
• Payroll Tax Exemption for Hiring Unemployed Workers
• HIRE Act: Questions and Answers for
