On March 18, 2010, President Barack Obama signed into law the Hiring Incentives to Restore Employment Act ("HIRE Act"), which incentives employers to hire unemployed workers through a Social Security payroll tax exemption, and incentives employers to retain employees for at least a year through a business tax credit.

Qualified Employers and Qualified Individuals

The HIRE Act applies to "qualified employers," and its tax exemption applies to newly hired "qualified individuals."  

Qualified employers are defined as private sector employers — including non-profit organizations — and public higher education institutions.  Federal, state and local government employers and instrumentalities are not qualified employers.  

In general, a qualified individual is one hired after February 3, 2010, and before January 1, 2011, who had been unemployed for at least 60 days prior to the date of hire; however, a newly hired worker will not be a qualified individual if the worker is hired to replace another employee, "unless such other employee is separated from employment voluntarily or for cause."  Additionally, family members, as defined in §51(i)(1) of the Internal Revenue Code, are not qualified employees.

To be a qualified individual, the newly hired worker also must sign an affidavit, under the penalties of perjury, certifying that he or she has not been employed more than 40 hours during the 60-day period they were unemployed.  The IRS is preparing a model affidavit for employers to use, but employers are free to use their own form so long as it includes the required information and statements.

The HIRE Act does not distinguish between newly hired full-time and part-time employees.

Social Security Tax Exemption

Normally, employers and employees each must pay a 6.2 percent Social Security tax on the first $106,800 of wages earned in 2010.  Under the HIRE Act, however, employers need not pay the Social Security tax for the period of February 3, 2010, through December 31, 2010, with respect to the "qualified individuals" it hires (employers must continue to pay all other payroll taxes).

Because the HIRE Act was signed into law on March 18, 2010, but applies to employees hired after February 3, 2010, the HIRE Act provides for a credit against second quarter Social Security taxes for the Social Security taxes the employer paid during the first quarter with respect to newly hired qualified individual.  On March 22, 2010, the IRS released a revised draft of Form 941, Employer's Quarterly Federal Tax Return, reflecting the changes made by the HIRE Act.

Retention Credit

Qualified employers also can receive a one-time increase in the taxable year's business credit for retaining new workers beyond 2010.  The HIRE Act provides a credit for each "retained worker."  The term "retained work" is defined as those:

  1. Employed by the employer on any date during the taxable year;
  2. Employed by the employer for no less than 52 consecutive weeks; and
  3. Whose wages during the last 26 weeks of that period equals at least 80 percent of such wages for the first 26 weeks of that period.
The amount of the increase in business credit will be the lesser of $1,000 or 6.2 percent of the wages paid for those 52 weeks for each such retained worker.

Employers can and should immediately begin taking advantage of these new tax breaks that the HIRE Act provides.