Payroll Tax Forgiveness: IRS Issues Draft Form for Review


For those of us awaiting guidance from the IRS about the new Payroll Tax Forgiveness Program of 2010, there is some good news.  A draft IRS Form W-11 has been posted on the IRS Website, in addition to a set of Frequently Asked Questions or FAQs.
Until the IRS moves it, you can download the draft Form W-11 here.  FAQs are found here.
Payroll Tax Forgiveness (or exemption) is part of the recently passed Hiring Incentives to Restore Employment Act (Hire Act).   An employee qualifies if they have been unemployed (meaning no more than 40 hours of work) for at least 60 days prior to their date of hire. Identifying qualifying employees requires a screening process at the time of hire, including an attestation signed by the employee.
A Note to My Clients. Before discussing the new IRS form and FAQs, I want to tell my clients that we are screening to identify employees qualifying for payroll tax exemption.  Since the program was just signed into law on March 18th, we have a good jump on things. If you are my client, you have already received (or very soon will receive) updated materials and service agreement.
About the Form.  The best news about the draft form W-11 is that employers are NOT REQUIRED to actually use the form. W-11 would serve as a model that employees CAN use, but we have the option of using our own form if it meets the statutory requirements.  As the draft form’s instructions state

“You can use another similar statement if it contains the information above and the employee signs it under penalties of perjury.”

The FAQs.  In their current state, the FAQs do not address the more technical questions about the Payroll Tax Forgiveness program.
Various questions about eligible employers and qualifying employees are answered.  We are told that we should claim the payroll benefit using Form 941, Employer’s QUARTERLY Federal Tax Return.  It is also made clear that an employer can not claim both payroll tax exemption and the WOTC benefit on the same wages.

“An employer that wishes to claim the Work Opportunity Tax Credit with respect to a qualified employee can elect out of the payroll tax exemption with respect to wages paid to that qualified employee.”

Question Still Not Answered. An important issue that is not addressed is the timing problem associated with electing out of the payroll tax exemption for an employee that might also qualify under WOTC.
As stated in the IRS’s FAQs, payroll tax exemption is to be claimed at least quarterly, using Form 941.  The problem is, it frequently takes longer than a quarter to ascertain an employee’s eligibility under the WOTC program.  Documentation of WOTC eligibility can take some time to acquire.  In some states, the WOTC certification process alone takes more than 12 months!
For Example. Let’s say an employer believes their new employee qualifies under both programs and so elects WOTC because WOTC benefits would be more valuable.  In that case, the employer continues to submit their payroll tax for that employee, expecting to claim WOTC tax credits at the end of the tax year.
But then 5 weeks, or 3 months, or 6 months later they are informed that the WOTC certification has been denied.  Will the IRS smile upon that employer when they attempt to amend their payroll taxes to claim the missed exemption on that employee?
The alternate scenario is more intriguing.  What if that same employer elects payroll tax exemption at the time of hire but then receives a WOTC certification for the employee a few months later?  Will the IRS now allow that employer to elect WOTC and to make a late payment on the payroll tax that should have been submitted during the previous months?
As soon as I know something more, I’ll pass it along to you.  Since neither I nor this publication can provide legal or accounting advice, I urge you to discuss the matter with your accountant and your payroll services provider.
Please feel welcome to call me at (800) 655-5281 extension 101.  I am happy to answer your questions, or point you to someone who can.

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