Employers may be eligible for a Social Security tax exemption for every qualified worker who starts employment after February 3, 2010, and before January 1, 2011, under the Hiring Incentives to Restore Employment (HIRE) Act, signed into law by President Obama on March 18, 2010. For purposes of the exemption:

• The worker must have been employed for fewer than 40 hours during the 60-day period prior to his or her start date;
• The employer cannot hire new workers to replace other employees, unless the other employees leave voluntarily or for cause; and
• The worker cannot be related to the employer.

Employers must obtain affidavits from qualified new hires, signed under penalties of perjury, confirming that they meet the conditions for the exemption. The IRS has issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, for this purpose. Employers may use a similar statement if it provides the same information. The statements should be retained with the employer's payroll and income tax records; they do not need to be filed with the IRS.

The maximum value of the exemption is equal to 6.2 percent of wages up to the Social Security wage base of $106,800. The exemption applies to wages paid for employment from March 19, 2010, through December 31, 2010. Employers can claim the exemption on Form 941, Employer's Quarterly Federal Tax Return, beginning with the second quarter of 2010. For wages paid during the first quarter (March 19, 2010, through March 31, 2010), the employer can claim the exemption on Form 941 for the second quarter.

The exemption will have no effect on the employee's future Social Security benefits, and employers still need to withhold the employee's 6.2-percent share of Social Security taxes, as well as income taxes. Also, both the employer and employee shares of Medicare taxes continue to apply to these wages.

Source:  CCH Human Resources Management COMPENSATION ¶3902.