Business Owner’s Relatives May Qualify for New Payroll Tax Breaks

The Hiring Incentives to Restore Employment Act (the HIRE Act) includes two temporary payroll tax breaks intended to boost hiring. An interesting point about these breaks is that they could be claimed for a business owner’s newly hired spouse. They might also be claimed for wages paid to other newly hired relatives of a minority business owner (a person who owns 50% or less of the employer, after considering both direct and indirect ownership). The information below summarizes how the two tax breaks can apply for wages paid to spouses and other relatives of business owners.

Social Security Tax Exemption for Wages Paid to Eligible New Hires

Wages paid by a private-sector business (large and small alike) to a qualified new employee between March 19, 2010 and December 31, 2010, are exempt from the 6.2% employer portion of the social security tax. The maximum amount of employer social security tax savings for a high-paid employee is $6,622 (6.2% × $106,800 social security tax ceiling for 2010). However, the actual savings realized will be less for high-paid workers who are paid less than $106,800 between March 19, 2010 and year-end.

Qualified new employees are full-time or part-time workers who start work between February 4, 2010 and December 31, 2010, and who provide the employer with a signed IRS Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, certifying that they were not employed more than 40 hours during the 60-day period ending on their start dates. However, the new worker cannot replace another worker unless that person quit voluntarily or was discharged for cause.

Employer Is a Sole Proprietor. When the employer is a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes, wages paid between the specified dates to the taxpayer’s (owner’s) newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the preceding definition of a qualified new employee. Wages paid to other newly hired relatives of the owner (including in-laws) generally will be ineligible.

Employer Is a Corporation. When the employer is a corporation, wages paid between the specified dates to a majority shareholder’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority shareholder owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority share-holder (including in-laws) generally will be ineligible. However, wages paid either to a newly hired spouse or other relative of a minority shareholder are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority owner.

Employer Is a Partnership. When the employer is a partnership (including a multimember LLC treated as a partnership for tax purposes), wages paid between the specified dates to a majority partner’s newly hired spouse are eligible for the temporary social security tax exemption if the spouse meets the definition of a qualified new employee. (A majority partner owns more than 50% of the employer, after considering both direct and indirect ownership.) Wages paid to other newly hired relatives of a majority partner (including in-laws) generally will be ineligible. However, wages paid to a newly hired spouse or other relative of a minority partner are eligible if the new hire meets the definition of a qualified new employee and is not a relative of the majority partner.

Tax Credit for Retaining Eligible New Hires

In addition to the social security tax exemption, employers can also claim a new temporary tax credit of up to $1,000 for wages paid to each qualified new employee who is retained for at least 52 consecutive weeks. Wages paid during the second 26 weeks of the 52-week period must equal at least 80% of wages paid during the first 26 weeks of that period. The definition of a qualified new employee is the same as for the social security tax exemption.

The credit amount equals the lesser of 6.2% of wages paid during the 52-consecutive-week period, or $1,000. To claim the maximum $1,000 credit, the worker must be paid at least $16,130 during the 52-week period.

Here’s the important point: even if the new hire is a spouse or relative of a business owner and is eligible for the social security tax exemption, wages paid to that spouse or relative may also be eligible for the new employee retention credit. That’s because the definition of a qualified new employee is the same for both breaks.

Time Is of the Essence

If you have questions or want more information about the temporary social security tax exemption or the temporary new employee retention credit, please contact us. The eligibility rules in family business situations are complicated, and these breaks will soon expire.