941 Pitfalls Await Employers This Year

Well here it is again time for the 2nd quarter 941 to be completed and filed for 2010. And while 941’s are notorious for being hard to file even for those who have filed them in the past this year’s 941’s are especially tricky.

This is due to the added new problems and possible errors created by the Hiring Incentives to Restore Employment Act (HIRE) passed as part of the stimulus package earlier this year.

Under the provisions contained in HIRE employers hiring new employees after February 3rd of this year no longer have to pay the employers portion of Social Security due on the wages of these new employees.

Employers figure the total Social Security and Medicare due on all employees’ wages and then claim “forgiveness” for their portion of the Social Security due on new employees qualifying under HIRE. And while that sounds simple enough the IRS reports that they are seeing a large increase in the number of mistakes being made. These mistakes range from putting the forgiveness amount on the wrong line to claiming the credit for non qualified employees.

Due to these problems the IRS is increasing audits of 941’s and more closely examining all 941’s received. They will also be doing compliance audits to insure that employers haven’t fired employees just to replace them with new workers to claim the HIRE credit.

So a word to the wise take great care with your 941’s this year and expect possible fees or fines for mistakes that would have been waived in the past to be enforced.

Also be very sure that you claim only one credit for each new hire. Often the IRS is finding that employers are also claiming the Work Opportunity Tax Credit (WOTC) as well as the HIRE credit on the same employees. You can only claim one or the other not both.

Usually the HIRE credit will be the one to take since it has simpler qualifying rules, is much easier to figure, and usually results in the largest credit. But in some cases the WOTC will result in a larger credit and will therefore be the one to use.

Just be sure you understand the qualifications for the WOTC credit are more restrictive than for the HIRE payroll forgiveness credit. The WOTC rewards keeping a qualified new hire employed for 52 weeks. The max credit is the lesser of $1000 per employee or 6.2% of the wages they earned during those 52 weeks. You can take the HIRE payroll forgiveness or the WOTC but not both for the same employee.

If you have taken the HIRE payroll forgiveness and then realize that the WOTC would have been a better credit for any employee, you can amend your 941’s with the new 941X to make the adjustment.

You can get more information and details about these credits and the qualifying rules here on the IRS web sites HIRE information page.