Finance: How your ‘bonuses’ can pay a bonus

Keeping good employees is always a bonus.

If you have kept employees hired under the HIRE Act, that bonus could come at tax time.

The HIRE Act

Passed in March 2010, the HIRE Act rewarded employers who hired workers who had been unemployed for 60 days or more. Tax relief came in the form of an exemption from Social Security payroll taxes.

The credit applies only for workers hired after Feb. 3, 2010, and before Jan. 1, 2011.

For each worker retained for at least a year, there is an additional general business tax credit of up to $1,000 per qualified worker. The credit can be claimed on 2011 income tax returns.

How the Retention Bonus Works

An employer can claim the bonus credit for each qualified worker retained for at least 52 consecutive weeks whose wages in the second 26-week period are at least 80 percent of the wages in the first 26-week period.

Employees can be full-time or part-time, and there are no restrictions on the type of work performed, age or geography.

The amount of the credit is the lesser of $1,000 or 6.2 percent of wages paid by the employer to the retained worker during the 52 consecutive week period.

The new hire retention credit can be claimed for any qualified employee, as previously defined for purposes of the payroll tax exemption.

Form W-11 HIRE Act Employee Affidavit

To claim the earlier exemption, an employee must have completed Form W-11, HIRE Act Employee Affidavit, or a similar statement certifying that the employee had been unemployed for 60 days or more. Employers do not need to file or send the signed employee affidavit to the IRS, but should retain these affidavits with other payroll and income tax records.

The employer must have the signed affidavit by the time the employer files Form 941 Quarterly Federal Tax Return applying the payroll tax exemption.

One Example

Say that a qualified worker, as defined by the HIRE Act, was hired in 2010 for a position that pays $25,000 a year. Of that amount, $20,000 was earned in 2010 and qualifies for an exemption of $1,240 for the employer's share of Social Security tax in 2010 ($20,000 x 6.2 percent).

That employee is retained for 52 consecutive weeks from the date of original hire - as defined by the HIRE Act - so there is an additional retention tax credit of $1,000 ($25,000 salary x 6.2 percent is $1,550, but is limited to $1,000).

Add the initial Social Security exemption ($1,240) and the retention credit ($1,000) together for $2,240 in capital that would otherwise have been sent off to Uncle Sam.

What is a Qualified Worker?

Qualified workers are individuals who:

•  Began employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011
•  Have been unemployed, or employed for 40 hours or fewer during the 60-day period, ending on the date such employment begins
•  Are not employed by the qualified employer to replace another employee, unless the other employee separated from employment voluntarily or was terminated for cause
•  Are not related to anyone who owns directly or indirectly more than 50 percent of the business.

You may be thinking to yourself: “I have qualified employees, but I never obtained the paperwork or applied for the original payroll tax exemption - is there still an opportunity to obtain the bonus credit?”

The short answer is yes. With the right plan of action you can obtain not only the bonus credit but also the original payroll tax exemption.

As mentioned above, employers must receive the completed Form W-11 by the time the employer files an employment tax return. Employers who have eligible employees hired after Feb. 3, 2010, and before Jan. 1, 2011, but neglected to claim the payroll tax exemption during 2010, should consider an amended payroll tax return on Form 941-X.

An amended return can be filed for earlier periods to claim the exemption on wages paid to qualified employees described above. The exemption is equal to the employer's share of social security tax on wages paid to these workers from March 19, 2010 through Dec. 31, 2010.

Ask your tax adviser for assistance with these filings.