New Hire Credit Form Now Available

The IRS has just released Form W-11 that will help employers claim the special payroll tax exemption that relates to certain employees hired in 2010. The employees must have been unemployed 60 days prior to the hire date. The employer will then take the credit on their quarterly payroll tax returns starting with the 2nd quarter of 2010.

The credit is equal to the employers’ share of Social Security tax or 6.2% of the payroll. This equates to a credit of $3,100 on a $50,000 salary. The employees share is still withheld from their pay and remitted and this will not have an effect on the employee’s future Social Security benefits.

Additionally if the employer retains the employee for at least a year they can claim an additional credit of $1,000 on their 2011 income tax returns. Note—exempt organizations will not qualify for the $1,000 credit.

A new hire will only qualify if:

• They were unemployed for 60 days prior to the hire date


• The workers they are replacing left voluntarily or for cause or this is to fill a new position


• They are not family members or relatives.

This tax benefit has an immediate cash flow effect as the tax on these wages is not remitted to the IRS with your payroll taxes. Also there are no minimum hours that the new employee must work.

For more information see the IRS website.

Employee vs. Subcontractor

If you are a small non profit with just a few part time employees you may be considering reclassifying the employees as subcontractors to cut down on the payroll filing hassles. Be careful though, the IRS has guidelines as to who is an employee and who is a subcontractor. Generally a subcontractor is someone who you can only direct the results of the work, not the way the work is accomplished. The IRS provides more detail at www.irs.gov in Publication 15A Section 2: Employee or Independent Contractor? There they list ten main criteria to consider when deciding if someone is an employee or a subcontractor. These criteria include where and when the work is performed; if the person uses their own supplies to do the job; or the organization’s supplies; and if the person performs the same work for other organizations. It is important to carefully review the criteria and if you decide that someone is a subcontractor to document the reasons why. If the IRS decides they are actually an employee, the organization could face penalties.