FAQ About the Payroll Tax Exemption and Qualified Employers

Q1: What is the payroll tax exemption?

A1: The payroll tax exemption is an exemption from the employer’s 6.2 percent share of social security tax on all wages paid to qualified employees from March 19, 2010 (the day after the date of enactment of the HIRE Act) through December 31, 2010. The employee’s 6.2 percent share of social security tax and the employer and employee’s shares of Medicare tax still apply to all wages.

Q2: Which employers qualify for the payroll tax exemption?

A2: Taxable businesses and tax-exempt organizations qualify for the payroll tax exemption. Such employers in U.S. territories (i.e., American Samoa, Commonwealth of Northern Mariana Islands, Guam, the U.S. Virgin Islands and Puerto Rico) that are subject to federal social security tax also qualify for the payroll tax exemption. Federal, State or local government employers generally do not qualify for the payroll tax exemption. However, public colleges and universities can qualify for the exemption. Indian tribal governments also qualify for the exemption.

Q3: Does the payroll tax exemption apply to household employers?

A3: No. The payroll tax exemption applies only to wages paid to a qualified employee performing services in the employer’s trade or business or in activities in furtherance of a tax-exempt organization’s exempt purpose.

Q4: If an employer starts a new business, does the payroll tax exemption apply to wages paid to employees hired for the new business?

A4: Yes, if they are qualified employees.

Q5: If an employee laid off in 2009 has been receiving COBRA premium assistance, for which the employer has been taking the COBRA premium assistance credit, and the employer rehires the employee, can the employer take the payroll tax exemption under the HIRE Act for wages paid to the employee?

A5: Yes, if the employee is a qualified employee.