Form 941 Revised to Include Payroll Tax Exemption in HIRE Act

The IRS has issued an April 2010 version of Form 941, Employer's Quarterly Federal Tax Return. The form was revised to take into account the payroll tax exemption legislation in the "Hiring Incentives to Restore Employment Act" (HIRE Act, P.L. 111-147). The legislation allows certain employers to forego payment of their share of the Social Security taxes (6.2% tax rate) on wages paid from March 19, 2010 to Dec. 31, 2010 to new hires who meet certain requirements.

Claiming the payroll tax exemption has no effect on the employee's future Social Security benefits. The employee's 6.2% share of Social Security tax, and the employer and employee's shares of Medicare tax, still apply to all wages earned by new hires.

The payroll tax exemption will be reported by quarterly employment tax filers on Form 941, beginning with the second quarter return due on Aug. 2, 2010. The following lines have been added to Form 941:

  • Line 6a. Number of qualified employees first paid exempt wages/tips this quarter.
  • Line 6b. Number of qualified employees paid exempt wages/tips this quarter.
  • Line 6c. Exempt wages/tips paid to qualified employees this quarter.
  • Line 6d. Line 6c X .062.
  • Line 12c. Number of qualified employees paid exempt wages/tips March 19-31.
  • Line 12d. Exempt wages/tips paid to qualified employees March 19-31.
  • Line 12e. Line 12d X .062.

Qualified employers are allowed a credit in the second quarter of 2010 for their share (6.2%) of Social Security tax on wages/tips paid to qualified employees after March 18, 2010, and before April 1, 2010 (lines 12c-12e). The instructions to Form 941 note that the amount reported on line 12e (Payroll tax exemption on wages/tips paid to qualified employees after March 18, 2010, and before April 1, 2010) is treated as a deposit of taxes on April 1, 2010. Form 941 and the instructions advise employers to complete lines 12c, 12d, and 12e only for the second quarter of 2010. The instructions caution filers that if any of the above lines are completed for any quarter other than the second quarter of 2010, Form 941 may be considered incomplete and subject to correction and penalties.

Qualified employers are allowed an exemption for their share (6.2%) of Social Security tax on wages/tips paid to qualified employees after March 31, 2010, and before Jan. 1, 2011 (lines 6a-6d).

If a qualified employee began employment in late March, but the employer does not pay the employee until April, the employer will include the employee in the number reported on both lines 6a and 6b of the second quarter Form 941 and will include wages paid to the qualified employee in the second quarter on line 6c. If a qualified employee receives wages during the period of March 19 through March 31, the employer will include the qualified employee on line 12c of the second quarter Form 941 and will include the wages paid in such period on line 12d. The IRS notes that line 6b is cumulative for qualified employees with respect to whose wages the employer is applying the payroll tax exemption in that quarter. For example, if an employer hires 30 qualified employees in March, 30 in April, 30 in May, and 30 in June, and applies the payroll tax exemption with respect to wages paid to all of the qualified employees in the second quarter, line 6b would show 120 employees on the second quarter return [IRS FAQs About Claiming the Payroll Exemption, PEs 14-16, 5/6/10].

Form 941, Schedule B, Report of Tax Liability for Semiweekly Schedule Depositors, has not been revised. The February 2009 version of Schedule B remains in effect. An employer will not separately report the payroll tax exemption or the first quarter credit on Form 941, Schedule B. An employer's report of its liability for the second, third, and fourth quarters of 2010 on Schedule B will reflect the reduction in liability due to application of the payroll tax exemption to wages paid to qualified employees during those quarters [IRS FAQs About Claiming the Payroll Exemption, PE 19, 5/6/10].

Employers must claim the exemption on the return for the quarter in which they paid the related wages [IRS FAQs About Claiming the Payroll Exemption, PE 17, 5/6/10].

The IRS will not revise Form 941 for the third and fourth quarters of 2010.

The instructions to Form 941 also note that an employer may elect not to claim the payroll tax exemption with respect to a qualified employee. The election is made by not including that employee, or that employee's wages, on lines 6a-6d and lines 12c-12e. An election not to apply the payroll tax exemption for a qualified employee may allow a qualified employer to claim the work opportunity credit for that employee. A qualified employer cannot claim both the payroll tax exemption on Form 941 and the work opportunity credit for the same employee.