¶ 101. Employer OASDI tax is forgiven through Dec. 31, 2010 for employers that hire unemployed workers
Code Sec. 3111(d), as amended by 2010 HIRE Act §101(a)
Code Sec. 51(c)(5), as amended by 2010 HIRE Act §101(b)
Code Sec. 3111, 2010 HIRE Act §101(c)
Code Sec. 3221(c)(1), as amended by 2010 HIRE Act §101(d)(1)
Code Sec. 3221, 2010 HIRE Act §101(d)(2)
Generally effective: Wages paid after Mar. 18, 2010, and before Jan. 1, 2011
Committee Reports, see ¶5401
FICA taxes.

The Federal Insurance Contributions Act (FICA) imposes two taxes, the Old Age, Survivors and Disability Insurance (OASDI) tax and the Medicare Hospital Insurance (HI) tax. These taxes, which finance Social Security Act benefits, are imposed on employers on wages paid with respect to employment and on employees on wages received with respect to employment. ( FTC 2d/Fin ¶H-4546; , FTC 2d/Fin ¶H-4685; TaxDesk ¶541,000; )

The OASDI tax rate is 6.2% on wages up to an annually-adjusted “wage base” ($106,800 for 2010). The HI tax rate is 1.45% on all wages, regardless of amount. FTC 2d/Fin ¶H-4687; TaxDesk ¶541,002;

Under pre-2010 HIRE Act law, there was no payroll tax forgiveness for employers who hired the unemployed.

Work opportunity credit.

Employers who hire members of certain targeted groups before Sept. 2011 may claim a work opportunity credit equal to a percentage of up to $6,000 of first-year wages per employee, $12,000 for qualified veterans, and $3,000 for qualified summer youth employees. If the employee is a long-term family assistance recipient, the credit is a percentage of first- and second-year wages, up to $10,000 per employee. ( FTC 2d/Fin ¶L-17775; et seq. USTR ¶514; TaxDesk ¶380,700; et seq.)

New Law. The 2010 HIRE Act provides relief from the employer share of OASDI taxes for wages paid by employers that hire unemployed workers. The relief applies to wages paid beginning on Mar. 19, 2010 and ending on Dec. 31, 2010. (Com Rept, see ¶5401) See below for a special rule for the first calendar quarter of 2010.

For a $1,000 business credit for 2011 for each “retained worker,” see ¶102 .

Payroll tax holiday.

The OASDI tax on employers doesn't apply to wages paid by a qualified employer (defined below) with respect to employment during the period beginning on Mar. 19, 2010 and ending on Dec. 31, 2010, of any qualified individual (defined below) for services performed: (Code Sec. 3111(d)(1) as amended by 2010 HIRE Act §101(a))

... in a trade or business of the qualified employer, or (Code Sec. 3111(d)(1)(A) )
... for a qualified employer that is tax-exempt under Code Sec. 501(a) , in furtherance of the activities related to the purpose or function on which the employer's exemption is based. (Code Sec. 3111(d)(1)(B) )

RIA observation: The payroll tax holiday applies only to the 6.2% OASDI portion of the employer's tax. It doesn't apply to the 1.45% Medicare (HI) portion of the employer's tax, nor to any part of the employee's tax. It also doesn't apply to the self-employment tax paid by self-employed individuals.
RIA observation: There's no limit on the total amount of an employer's OASDI tax that may be forgiven under this provision. However, the amount of tax forgiven for any employee can't exceed $6,621.60, because the OASDI tax applies to only the first $106,800 of wages paid in 2010 ($106,800 × 6.2% = $6,621.60).
RIA observation: An employee need not work for a minimum number of hours in order for the employer to qualify for the payroll tax holiday. Thus, the holiday is available for wages paid to part-time employees.
RIA observation: The payroll tax holiday ends for wages paid after Dec. 31, 2010. Thus, hiring an unemployed worker earlier in the year will increase the tax saving.
RIA illustration 1: On April 1, 2010, a qualified employer hires a qualified individual earning $90,000 per year. The employee continues working for the employer for the rest of 2010 (three-quarters of the year). The payroll tax holiday will save the employer $4,185 in OASDI tax ($90,000 × ¾ × 6.2%).
If the same individual were hired on July 1, 2010, and worked for the employer for the rest of 2010 (one-half of the year), the tax saving would be $2,790 ($90,000 × ½ × 6.2%).

Which employers qualify.

The term “qualified employer” means any employer other than the U.S., a state, a political subdivision of a state (i.e., a local government (Com Rept, see ¶5401) ), or an instrumentality of the above. (Code Sec. 3111(d)(2)(A) )

However, a public institution of higher education, as defined in Sec. 101(b) of the Higher Education Act of 1965, is a qualified employer even though it is a government instrumentality. (Code Sec. 3111(d)(2)(B) )

RIA observation: Thus, the payroll tax holiday applies to employers in the private and not-for-profit sectors. It doesn't apply to public-sector employers other than public institutions of higher education.
Which employees qualify.

The term “qualified individual” means an individual who: (Code Sec. 3111(d)(3) )

(1) begins employment with a qualified employer after Feb. 3, 2010, and before Jan. 1, 2011; (Code Sec. 3111(d)(3)(A) )
RIA observation: Although a qualified employee who begins work after Feb. 3, 2010 can be eligible for the payroll tax holiday, the employer's OASDI tax will be forgiven only for the wages paid after Mar. 18, 2010.
(2) certifies by signed affidavit, under penalties of perjury, that he hasn't been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer; (Code Sec. 3111(d)(3)(B) )
(3) isn't employed to replace another employee of the qualified employer unless that other employee separated from employment voluntarily or for cause; and (Code Sec. 3111(d)(3)(C) )
(4) isn't related to the qualified employer in a way that would disqualify him for the work opportunity credit under Code Sec. 51(i)(1) , see FTC 2d/Fin ¶L-17784.2; USTR ¶514; TaxDesk ¶380,709; . (Code Sec. 3111(d)(3)(D) )
An employer may qualify for the payroll tax holiday for hiring an otherwise qualified individual to replace an employee who was terminated for cause or due to other facts and circumstances, such as where a factory was closed for lack of demand. When the factory reopens, the payroll tax holiday can be claimed both for rehiring old workers and hiring new workers. However, an employer won't qualify if it terminates an employee without cause in order to claim the payroll tax holiday for hiring the same or another employee. (Com Rept, see ¶5401)


RIA observation: Under item (4), above, there's no payroll tax holiday for hiring the qualified employer's son, daughter, or descendant of either; stepson or stepdaughter; brother, sister, stepbrother, or stepsister; father, mother, or ancestor of either; stepfather or stepmother; son or daughter of brother or sister; brother or sister of father or mother; son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
If the qualified employer is:

... a corporation, an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% in value of its outstanding stock, after applying the Code Sec. 267(c) attribution rules (see FTC 2d/Fin ¶G-2711; USTR ¶2674.04; TaxDesk ¶227,913; ), won't qualify.
... a noncorporate entity, an individual standing in any of the above relationships to anyone who owns, directly or indirectly, more than 50% of the capital and profits interests in the entity won't qualify.
... an estate or trust, a grantor, beneficiary, or fiduciary of the estate or trust, or an individual having any of the familial relationships described above to a grantor, beneficiary, or fiduciary of the estate or trust, won't qualify.
An individual unrelated to the qualified employer who is the employer's dependent because he has the same principal place of abode and is a member of the employer's household won't qualify. If the qualified employer is a corporation, an individual who is a dependent of anyone who owns, directly or indirectly, more than 50% in value of the outstanding stock, won't qualify. A dependent of a grantor, beneficiary, or fiduciary of an estate or trust that is a qualified employer won't qualify.

RIA observation: Services performed outside the U.S. by a citizen or resident of the U.S. as an employee of an American employer are “covered employment” for FICA tax purposes (see FTC 2d/Fin ¶H-4571; TaxDesk ¶543,001; ). Nothing in the statute would exclude those employees from qualifying for the payroll tax holiday.
Special rule for first calendar quarter of 2010.

The payroll tax holiday doesn't apply for wages paid during the first calendar quarter of 2010. (Code Sec. 3111(d)(5)(A) ) Instead, the amount by which the qualified employer's OASDI tax for wages paid during the first calendar quarter of 2010 would have been reduced if the payroll tax holiday had been in effect for that quarter is treated as a payment against the qualified employer's OASDI tax for the second calendar quarter of 2010. (Code Sec. 3111(d)(5)(B) )

The payment is treated as made on the date when the employer's second-quarter OASDI tax is due. (Code Sec. 3111(d)(5)(B) ) For FICA tax due dates, see FTC 2d/Fin ¶S-5501; et seq. TaxDesk ¶559,501; et seq.

RIA observation: Most employers report FICA taxes quarterly on Form 941, see FTC 2d/Fin ¶S-2603; USTR ¶60,114.011; TaxDesk ¶557,001; . The special rule, under which the payroll tax holiday doesn't apply for wages paid during the first quarter, will allow time for IRS to issue guidance and for employers to adjust their payroll systems accordingly.
Employers won't lose out, because the amount of first-quarter wages that would have been forgiven will be allowed as a credit for the second quarter. That amount will be relatively small, because the provision is effective for wages paid after Mar. 18, 2010, close to the end of the first quarter.

RIA illustration 2: A qualified employer hires a qualified individual on March 1, 2010. Because the payroll tax holiday doesn't apply for the first calendar quarter of 2010, the employer must pay the regular OASDI tax on wages paid to the employee in that quarter.
However, the employer's OASDI tax on the employee's first-quarter wages after Mar. 18, 2010 is treated as a payment against the employer's OASDI tax for the second calendar quarter of 2010.

Election out of payroll holiday.

A qualified employer may elect, in the manner that IRS requires, not to have the payroll tax holiday apply. (Code Sec. 3111(d)(4) )

Coordination with work opportunity credit.

Unless the employer elects out of the payroll holiday, wages paid or incurred to a qualified individual won't qualify for the work opportunity credit during the one-year period beginning on the date that the qualified employer hired the individual. (Code Sec. 51(c)(5) as amended by 2010 HIRE Act §101(b))

Thus, a qualified employer may not receive the work opportunity credit on any wages paid to a qualified individual during the one-year period beginning on that individual's hiring date if those wages qualify the employer for the payroll tax holiday unless the employer elects not to have the payroll tax holiday apply to that individual. (Com Rept, see ¶5401)

RIA observation: Employers must choose between the payroll tax holiday and the work opportunity credit. The default is the payroll tax holiday, unless the employer elects otherwise. The Committee Report (above) indicates that the election can be made on an employee-by-employee basis.
The work opportunity credit may be more valuable, especially for low-wage employees and those hired late in 2010, because it is generally 40% of “qualified first-year wages” of up to $6,000, for maximum credit of $2,400 per worker, see FTC 2d/Fin ¶L-17778; USTR ¶514; TaxDesk ¶380,700.1; . The payroll tax holiday is equal to 6.2% of wages, and applies only to wages paid through Dec. 31, 2010.

However, the work opportunity credit is harder to qualify for, because the employee must be certified by a state agency as a member of a targeted group, see FTC 2d/Fin ¶L-17784.1; USTR ¶514; TaxDesk ¶380,708; . The main qualification for payroll tax holiday is that the employee have been unemployed for 60 days, and the employee's affidavit is sufficient for this purpose. Moreover, the work opportunity credit reduces the employer's deduction for compensation paid, see FTC 2d/Fin ¶L-17780; USTR ¶514; TaxDesk ¶380,703; .

Transfers to social security and disability trust funds.

Amounts are appropriated and will be transferred from the U.S. Treasury's general fund to the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund equal to the revenue lost because of the payroll tax holiday. The time and manner of those transfers will replicate to the extent possible the time and manner of the transfers that would have occurred without the payroll tax holiday. (2010 HIRE Act §101(c))

Railroad retirement tax holiday.

Chapter 22 of the Internal Revenue Code imposes railroad retirement taxes on employers and employees. Under Code Sec. 3221(a) , employers pay a Tier 1 tax at a rate equal to the sum of the social security OASDI and HI rates on compensation paid during the calendar year. See USTR ¶32,014; .

The 2010 HIRE Act provides a railroad retirement tax holiday that is similar to the FICA tax holiday. A qualified employer will pay Tier 1 tax at the HI rate only (i.e., the OASDI portion is forgiven) on compensation paid with respect to a qualified individual during the period beginning on Mar. 19, 2010 and ending on Dec. 31, 2010. (Code Sec. 3221(c)(1) as amended by 2010 HIRE Act §101(d)(1))

The following railroad retirement provisions parallel the FICA tax provisions discussed above:

... the definition of “qualified employer” (Code Sec. 3221(c)(2) ) ,
... the definition of “qualified individual” (Code Sec. 3221(c)(3) ) ,
... the election out of the payroll tax holiday (Code Sec. 3221(c)(4) ) ,
... the special rule for the first calendar quarter of 2010 (Code Sec. 3221(c)(5) ) , and
... the provision for transfers from the general fund. (2010 HIRE Act §101(d)(2))

Effective: Wages paid after Mar. 18, 2010 (2010 HIRE Act §101(e)(1)) and before Jan. 1, 2011. (Code Sec. 3111(d)(1) )

The railroad retirement tax holiday applies to compensation paid after Mar. 18, 2010 (2010 HIRE Act §101(e)(2)) and before Jan. 1, 2011. (Code Sec. 3221(c)(1) )