Payroll Tax Forgiveness

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Future of The HIRE Act’s Payroll Tax Exemption Benefit

Wednesday, November 24th, 2010

While many U.S. employers have taken advantage of the 2010 federal HIRE Act’s Payroll Tax Exemption benefit, many more have not.  As it currently stands, the Payroll Tax Exemption program is slated to expire on December 31, 2010; however, at least 2 facts mitigate the looming end of the program. 

First, employers who have not yet utilized the program still have an opportunity to catch up.  At my firm, we’re in the process of bringing on a new client with more than 35 business locations.  Even during this down economy, my new client has hired hundreds of employees since February 4th when the Payroll Tax Exemption program first kicked in. 

To claim the benefit, an employer must get a signed statement from the employee stating under penalty of perjury that they were unemployed during the 60 days prior to hire.  We know that many of these new employees were unemployed and would therefore be eligible.  So, as part of our boarding process, we’re surveying them — finding out which employees qualified at their time of hire. 

Now, this large employer will be exempt from the 6.2% employer-portion of the federal payroll tax for a goodly percentage of its 2010 hires.  To secure this benefit, it will have to file adjusted payroll tax returns for quarters 2 and 3. That should not be a problem.

Another benefit is that the qualifying employees who remain employed into next year (for at least 52 weeks of total employment) can trigger a bonus tax credit equal to another 6.2% of the wages paid during that first 52 weeks of employment.  We’ll continue following well into 2011 to determine the status of these employees.  Our client has an added incentive to keep them working.

For many, a technical question arises here.  Isn’t there a deadline for getting the employee’s signed affidavit?  Answer: Yes, and no.  Here’s the IRS’ way of explaining it. 

[T]he 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.  IRS FAQs

In other words, you must get the statement before you actually claim the benefit.  But, you can get the statement then go back and claim the benefit using an adjusted tax return.  In the case of my new client, their payroll service will need to file adjusted returns, IRS Form 941X in order to claim the benefit for quarters 1, 2 and 3.

So, where does this all go as of December 31, 2010?  Will the Payroll Tax Exemption program be extended for another year?  According to Paul E. Suplizio, President of the WOTC Coalition, there is no certainty but the odds favor an extension as Congress and the Administration continue to grapple with the problem of unemployment in 2011. 

If you have questions about the HIRE Act’s Payroll Tax Exemption program, or any other employment based tax benefit, please feel welcome to contact me.  I am Vaughn Hromiko, (800) 655-5281, ext 101 or vah@WOTCPlanet.com

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Americans Want to Work Act – Proposal Would Extend Payroll Tax Holiday

Monday, August 16th, 2010

U.S. Senator Debbie Stabenow of Michigan has introduced S3706, The Americans Want to Work Act.  Of most interest to this forum is that this bill would extend the HIRE Act’s Payroll Tax Exemption through the end of 2011.  The Payroll Tax Exemption is currently slated to expire on December 31, 2010.

From the Senator’s website:

HIRE Act Background: The HIRE Act, signed into law earlier this year, provides two new tax incentives for employers to hire unemployed workers. Under the HIRE Act, businesses that hire Americans who have been out of work for at least 60 days are exempt from paying their 6.2 percent share of Social Security payroll taxes for all new hires up to the FICA wage cap of $106,800. To promote long-term employment, the HIRE Act also provides an additional $1,000 general business tax credit for each worker retained for at least one year.

Americans Want to Work Act Provisions: The bill includes two key provisions that apply to all states:

*       Extends the successful HIRE Act Payroll Tax Exemption for one year, through the end of 2011.

*       Doubles the general business tax credit, from $1,000 to $2,000, for businesses that hire (and retain for 52 weeks) someone who has exhausted all unemployment benefits. This is applicable to anyone who has exhausted all unemployment benefits or that is eligible for Tier 5. This would be effective at the date of enactment.

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U.S. Treasury Department Reports RE HIRE Act Payroll Tax Exemption

Friday, August 6th, 2010

On August 2, the U.S. Treasury Department published a report titled Updated Estimates of Newly Hired Employees Eligible for the Hire Act Tax Exemption.  If you have a problem with that link, you can still read the Department’s press summary.

This new report provides monthly updated estimates of potential eligibility under the HIRE Act, including data through June 2010. According to the updated estimates, from February 2010 to June 2010, businesses hired 5.6 million new workers who had been unemployed for eight weeks or longer;

While it is interesting that businesses hired 5.6 million potentially eligible workers, the Treasure Department can not tell us anything yet about how many employees have actually been claimed as eligible.  That number is much much smaller — but how small we won’t know until next year after the 2010 tax returns has been analyzed.

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US Teasury Department Says Employers Missing Out on 2010 Payroll Tax Exemption – Obama Will Likely Push for Extension

Monday, July 12th, 2010

I found this piece by Deborah Solomon, published online today by the Wall Street Journal.

While accurate statistics will not be available until year’s end when companies complete the filing of their tax returns, anecdotal evidence suggest the HIRE Act’ 2010 Payroll Tax Exemption is far from being fully utilized by U.S. employers. In response, President Obama’s Treasure Department is expected to begin marketing the program more aggressively. The Obama Administration will also probably seek to extend the program beyond its current December 31, 2010 expiration date.

Note that Ms. Solomon characterizes the payroll tax exemption as a tax credit, which is not exactly accurate, but we can live with that!

Earlier this year, Congress approved a tax credit that rewards employers who hire those out of work 60 days or longer. Of the 15 million Americans now unemployed, about 6.8 million have been out of work longer than six months—more than at any time since the Labor Department began keeping track in 1948.

The Hiring Incentives to Restore Employment, or HIRE, exempts wages paid to qualifying workers from the employer’s 6.2% share of Social Security payroll taxes for the remainder of this year, and gives an additional $1,000 tax credit to employers for every worker they retain for 52 weeks.

The Treasury estimates that so far 4.5 million workers are eligible for the payroll tax exemption—a potential tax savings to employers of $8.5 billion—but Treasury officials worry businesses are unaware of the credit and might not take advantage before it expires in December. The administration will likely push for an extension.

According to the article, there are about 15 million Americans currently out of work. Of those, 6.8 million have been unemployed not only for 60 days but for longer than 6 month!

Please contact me, Vaughn Hromiko, with your questions about the HIRE Act’s Payroll Tax Exemption program.  Reach me by e-mail at vah@wotcplanet.com or toll free at 800-655-5281, ext 101.

DEBORAH SOLOMON

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Procedures for Correcting Form 941 – IRS Fed State & Local Governments Update

Monday, July 12th, 2010

The July 2010 issue of the IRS Federal State & Local Government Newsletter discusses procedures for making correction to IRS Form 941, which is the Employer’s Quarterly Federal Tax Return.

While the newsletter update does not directly address the HIRE Act’s Payroll Tax Exemption, it may be relevant to employers who need to adjust their IRS 941 as a result of identifying employees who qualify under that program.

http://www.irs.gov/pub/irs-tege/p4090_0710.pdf

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Revised IRS Form 941 to Claim Payroll Tax Exemption Now Available

Tuesday, May 18th, 2010

Hot off the IRS Newswire!

Today, the IRS issued a new Form 941, especially revised to accommodate the HIRE Act’s 2010 payroll tax exemption program.   For more information about the payroll tax exemption,  see my previous posts right here on the WOTCPlanet.com. Click here for a collection of posts on this topic.

Here are some excerpts from today’s IRS announcement.

WASHINGTON — The Internal Revenue Service has issued the newly revised payroll tax form that most eligible employers can use to claim the special payroll tax exemption that applies to many new workers hired during 2010.

and. . .

Form 941, Employer’s QUARTERLY Federal Tax Return, revised for use beginning with the second calendar quarter of 2010, will be filed by most employers claiming the payroll tax exemption for wages paid to qualified employees. The HIRE Act does not allow employers to claim the exemption for wages paid in the first quarter but provides for a credit in the second quarter. The instructions for the new Form 941 explain how this credit for wages paid from March 19 through March 31 can be claimed on the second quarter return.

For more information, please call me at 888-655-5281, extension 101. Or email me at vah@WOTCPlanet.com.

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HIRE Act Payroll Tax Exemption – Family Members of Employer Ineligible

Tuesday, May 18th, 2010

I received a call yesterday from a very nice Human Resources Manager asking about the HIRE Act’s Payroll Tax Exemption’s “family member” restriction.  Employers can not claim the payroll tax exemption for wages paid to members of the employer’s family.  Sounds simple, but exactly whose family members are restricted?  Let’s explore this issue a little.

On the IRS website, in response to the question “Who are eligible employees?” the IRS responds:

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 less than 40 hours during the 60-day period ending on the date such employment begins, and who are not family members of or related in certain other ways to the employer.

The instructions to IRS Form W-11 offer some additional details. When the employer is a sole proprietor, family relationships are pretty straight forward. 

An employee is related to you if he or she is your child or a descendent of your child, your sibling or stepsibling, your parent or an ancestor of your parent, your stepparent, your niece or nephew, your aunt or uncle, or your in-law.

However, if the employer is a corporation or other common type of tax entity, the restriction applies to any employee who

is related to anyone who owns more than 50% of your outstanding stock or capital and profits interest or is your dependent or a dependent of anyone who owns more than 50% of your outstanding stock or capital and profits interest

Form W-11′s instructions send you directly to the Internal Revenue Code for more information if the employer is an estate or a trust.  If this applies to you, please see section 51(i)(1) and section 152(d)(2) of the Internal Revenue Code for more information.

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IRS Publishes More Answers about HIRE Act Payroll Tax Holiday

Friday, May 14th, 2010

Additional answers to Frequently Asked Questions (FAQs) about the HIRE Act’s 2010 Payroll Tax Exemption (PTE) have been published on the IRS website.  Of particular interest should be the expanded FAQs about how to claim the PTE, including a new code on the form W-2 for employees whose wages are claimed under the program (see FAQ#25).

Oh, what the hey.  I’ll just copy a load of them here for your convenience. 

And here are the website links if you want to explore additional FAQs on this program. 

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: If an employer chooses to claim the WOTC for a qualified employee, can the employer still claim the new hire retention credit for that qualified employee?
A-PE11: Yes, an employer may claim the retention credit for a qualified employee even if the employer has also claimed the WOTC for the same employee.
The new hire retention credit can be claimed for any qualified employee, as defined for purposes of the payroll tax exemption, once the employee is employed for 52 consecutive weeks, so long as the employee’s wages (as defined for income tax withholding purposes) for the last 26 weeks of employment equal at least 80% of the employee’s wages for the first 26 weeks of employment.

PE12: How will employers claim the payroll tax exemption for wages paid to qualified employees from March 19, 2010, through March 31, 2010?
A-PE12: 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.

PE13: How will the IRS treat the credit claimed for wages paid in the first  quarter?
A-PE13: The IRS will treat the credit as a deposit made on the first day of the second quarter for quarterly payroll tax return filers.

PE14: 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-PE14: 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.

PE15: 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-PE15: The employer reports on lines 6a and 6b (or line 12c for 1st quarter) only qualified employees with respect to whom 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).

PE16: Is the number reported on line 6b of the Form 941 cumulative for all qualifying employees?  
A-PE16: 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.

PE17: 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-PE17: Employers must apply the exemption on the return for the quarter in which they paid the related wages.

PE18: 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-PE18: 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.

PE19: 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-PE19: 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.

PE20: When will updated forms be available (e.g., Forms 941, 943, 944, 941-X)?
A-PE20: 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.

PE21: When will the updated Form 94X Schema be available?
A-PE21: The IRS development of the 94X Schema is pending the finalized Form 941. The IRS anticipates it will be available in May.

PE22: Will the IRS revise Form 941again in the third and fourth quarters to remove lines 12 (c) and 12(d)?
A-PE22: 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.

PE23: 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-PE23: No.

PE24: How will the payroll tax exemption affect the breakout amounts on EFTPS?
A-PE24: 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.

PE25: 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-PE25: 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.

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From IRS Newswire – Special Payroll Tax Exemption Form Now Available

Friday, April 9th, 2010

The following is directly from the IRS Newswire dated April 7, which I received about 39 hours ago.  I reported on the new Form W-11 a few days ago after it was released in Draft form.  The Draft Form W-11 has been officially upgraded to real.

Allow me to suggest that you go back and review my previous post.  The Payroll Tax Holiday seems simple on its face; however, there are some operational questions in connection with the Work Opportunity Tax Credit (WOTC) that must be wrestled with (click here). 

Please feel welcome to contact me with your questions. Call (800) 655-5281, ext 101  or e-mail me at vah@WOTCPLanet.com.

Directly from the wire….

WASHINGTON — The Internal Revenue Service today released a new form that will help employers claim the special payroll tax exemption that applies to many newly-hired workers during 2010, created by the Hiring Incentives to Restore Employment (HIRE) Act signed by President Obama on March 18.

New Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, is now posted on IRS.gov, along with answers to frequently-asked questions about the payroll tax exemption and the related new hire retention credit. The new law requires that employers get a statement from each eligible new hire, certifying under penalties of perjury, that he or she was unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. Employers can use Form W-11 to meet this requirement.

Most eligible employers then use Form 941, Employer’s Quarterly Federal Tax Return, to claim the payroll tax exemption for eligible new hires. This form, revised for use beginning with the second calendar quarter of 2010, is currently posted as a draft form on IRS.gov and will be released next month as a final along with the form’s instructions.

Though employers need this certification to claim both the payroll tax exemption and the new hire retention credit, they do not file these statements with the IRS. Instead, they must retain them along with other payroll and income tax records.

The HIRE Act created two new tax benefits designed to encourage employers to hire and retain new workers. As a result, employers who hire unemployed workers this year (after Feb. 3, 2010, and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from the employer’s share of social security tax on wages paid to these workers after March 18. This reduction will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. In addition, for each unemployed worker retained for at least a year, businesses may claim a new hire retention credit of up to $1,000 per worker when they file their 2011 income tax returns.

These two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify for either of these tax incentives.

Businesses, agricultural employers, tax-exempt organizations, tribal governments and public colleges and universities all qualify to claim the payroll tax exemption for eligible newly-hired employees. Household employers and federal, state and local government employers, other than public colleges and universities, are not eligible. IRS.gov has more details.

Related Item: IR-2010-33, Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

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Payroll Tax Forgiveness: IRS Issues Draft Form for Review

Wednesday, March 31st, 2010

For those of us awaiting guidance from the IRS about the new Payroll Tax Forgiveness Program of 2010, there is some good news.  A draft IRS Form W-11 has been posted on the IRS Website, in addition to a set of Frequently Asked Questions or FAQs. 

Until the IRS moves it, you can download the draft Form W-11 here.  FAQs are found here.

Payroll Tax Forgiveness (or exemption) is part of the recently passed Hiring Incentives to Restore Employment Act (Hire Act).   An employee qualifies if they have been unemployed (meaning no more than 40 hours of work) for at least 60 days prior to their date of hire. Identifying qualifying employees requires a screening process at the time of hire, including an attestation signed by the employee.

A Note to My Clients. Before discussing the new IRS form and FAQs, I want to tell my clients that we are screening to identify employees qualifying for payroll tax exemption.  Since the program was just signed into law on March 18th, we have a good jump on things. If you are my client, you have already received (or very soon will receive) updated materials and service agreement.

About the Form.  The best news about the draft form W-11 is that employers are NOT REQUIRED to actually use the form. W-11 would serve as a model that employees CAN use, but we have the option of using our own form if it meets the statutory requirements.  As the draft form’s instructions state

“You can use another similar statement if it contains the information above and the employee signs it under penalties of perjury.”

The FAQs.  In their current state, the FAQs do not address the more technical questions about the Payroll Tax Forgiveness program.

Various questions about eligible employers and qualifying employees are answered.  We are told that we should claim the payroll benefit using Form 941, Employer’s QUARTERLY Federal Tax Return.  It is also made clear that an employer can not claim both payroll tax exemption and the WOTC benefit on the same wages. 

“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.”

Question Still Not Answered. An important issue that is not addressed is the timing problem associated with electing out of the payroll tax exemption for an employee that might also qualify under WOTC. 

As stated in the IRS’s FAQs, payroll tax exemption is to be claimed at least quarterly, using Form 941.  The problem is, it frequently takes longer than a quarter to ascertain an employee’s eligibility under the WOTC program.  Documentation of WOTC eligibility can take some time to acquire.  In some states, the WOTC certification process alone takes more than 12 months!

For Example. Let’s say an employer believes their new employee qualifies under both programs and so elects WOTC because WOTC benefits would be more valuable.  In that case, the employer continues to submit their payroll tax for that employee, expecting to claim WOTC tax credits at the end of the tax year.

But then 5 weeks, or 3 months, or 6 months later they are informed that the WOTC certification has been denied.  Will the IRS smile upon that employer when they attempt to amend their payroll taxes to claim the missed exemption on that employee?

The alternate scenario is more intriguing.  What if that same employer elects payroll tax exemption at the time of hire but then receives a WOTC certification for the employee a few months later?  Will the IRS now allow that employer to elect WOTC and to make a late payment on the payroll tax that should have been submitted during the previous months?

As soon as I know something more, I’ll pass it along to you.  Since neither I nor this publication can provide legal or accounting advice, I urge you to discuss the matter with your accountant and your payroll services provider.

Please feel welcome to call me at (800) 655-5281 extension 101.  I am happy to answer your questions, or point you to someone who can.

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