Churches and the New “HIRE” Act

Why now may be the best time to bring on more staff.

Earlier this year Congress enacted the Hiring Incentives to Restore Employment (HIRE) Act. The new law provides two new tax benefits to employers that hire workers who were previously unemployed or only working part time.

Employers who hire “qualified employees” after February 3, 2010 and before January 1, 2011 may qualify for a 6.2 percent payroll tax incentive. In effect, this will exempt them from their share of Social Security taxes on wages paid to these workers. The payroll tax exemption applies to wages paid to the qualified employee from March 19, 2010 (the day after the new law’s enactment) through December 31, 2010.

An employer can choose to apply the exemption with respect to none, some, or all of its qualified employees based on wages paid to the employee(s) from March 19, 2010, through December 31, 2010.

Churches and most other tax-exempt organizations qualify to claim the payroll tax benefit for eligible newly-hired employees.

Employers claim the payroll tax benefit on Form 941 beginning with the second quarter of 2010.

KEY POINT. The reduced tax withholding under the HIRE Act will have no effect on an employee’s future Social Security benefits, and employers will still need to withhold the employee’s 6.2 percent share of Social Security taxes, as well as income taxes.

KEY POINT. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

NOTE: Ministers are treated as self-employed for Social Security with respect to services performed in the exercise of ministry. This means that their employing church does not withhold Social Security and Medicare taxes from their wages. Instead, ministers pay the self-employment tax. As a result, this tax benefit is not available to newly hired ministers. Similarly, the benefit likely will not be available to churches that have filed a Form 8274 with the IRS, exempting themselves from the employer’s share of Social Security and Medicare taxes with respect to non-minister employees. The IRS has not yet addressed this issue or confirmed that this will be the case. Churches that have filed Form 8274 should check with a tax attorney or CPA, or with the IRS, for confirmation.

The HIRE Act also provides employers with a business tax credit of up to $1,000 for retaining certain employees for at least one year. The credit is claimed on the employer’s 2011 income tax return. This benefit will not apply to churches since they do not file income tax returns.

These tax benefits were enacted to encourage employers to add positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause.

This article first appeared in Church Finance Today, August 2010.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

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