Contractors Can Avoid Payroll Taxes on Seasonal Workers via HIRE Act

Under the Hiring Incentives to Restore Employment (HIRE) Act, signed into law March 18, 2010, contractors can be exempt from paying the employer’s 6.2 percent share of Social Security tax on wages paid during 2010 to certain seasonal workers.

In order to qualify, the newly hired employee must:

• Be hired (or rehired) after February 3, 2010, and prior to January 1, 2011
• Have been unemployed for the 60 days prior to being hired, or worked 40 hours or fewer during the same 60-day period
• Not have been hired to replace a terminated employee, unless the former employee voluntarily separated from employment or was separated for cause
• Provide the employer a statement certifying he or she was unemployed for the prior 60-day period
• Not be related to the employer, using rules similar to those that apply to the Work Opportunity Tax Credit (WOTC). If needed, consult your tax advisor for specific barred relationships.

“It is fairly clear that the seasonal termination and rehiring of employees in the construction industry is based upon inherent changes in business activity versus the planned replacement of existing employees,” says Darrel Mullenbach, a LarsonAllen principal who specializes in serving construction contractors. “Accordingly, the rehiring of those individuals should qualify for the payroll tax holiday under the HIRE Act.”

Employee certification
As noted above, the legislation requires the employee to provide a written statement declaring, under penalties of perjury, that he or she was unemployed, or did not work for more than 40 hours, during the 60-day period prior to hire or rehire. The IRS released Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, for this purpose. According to the IRS, a similar statement can be used in place of Form W-11, but it must contain all the same information (employee name, Social Security number, first date of employment, and the name of the employer), and the employee must sign it under penalties of perjury.

Take advantage: tax incentives effective now
According to Andy Biebl, a tax principal with LarsonAllen, employers want to act quickly to eliminate the 6.2 percent employer Federal Insurance Contributions Act (FICA) tax portion on any qualified new hire payroll effective April 1. He adds, “Businesses will need to review their records for any new hires who began work after February 3 to determine which are eligible for the new incentives.”

Because rehired seasonal workers can account for a large portion of a contractor’s payroll, this tax exemption could have a substantial effect on profitability and cash flows during 2010.

“Given the high level of competition in today’s contracting environment, responding quickly to this opportunity and evaluating its impact on costs can give your company a significant competitive advantage,” Mullenbach adds.

Read an expanded summary of the HIRE Act and its incentives.

Darrel Mullenbach, Construction and Real Estate Principal
dmullenbach@larsonallen.com or 612-376-4652

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