An OASDI Payroll Tax Holiday for Employers

The newly enacted HIRE Act provides an OASDI payroll tax holiday through December 31, 2010, for qualified employers who hire qualified employees after February 3, 2010.

Qualified employers are both for-profit and non-profit, including public institutions of higher education, but excludes all U.S., state and local government entities.

Qualified workers are workers who:
1. Begin employment with the employer after February 3, 2010, and before January 1, 2011,
2. Were previously unemployed and certify by signed affidavit that they have not been employed for more than 40 hours during the 60-day period ending on the first day of employment, and
3. Do not replace other employees unless the replaced employee separated voluntarily or for cause.

The payroll tax holiday applies only to the 6.2% OASDI portion of the employer's tax. It does not apply to the 1.45% Medicare (HI) portion of the employer's tax, nor to any part of the employee's tax. It also does not apply to the self-employment tax paid by self-employed individuals.

How This Affects Tax for the First Quarter
In order to transition into the payroll tax holiday, the reduction will not apply to wages paid during the first quarter of 2010. Instead, the amount by which the employer's OASDI tax for wages paid during the first quarter would have been reduced if the payroll tax holiday had been in effect will be treated as a payment against the qualified employer's OASDI tax for the second quarter of 2010.

The payment is treated as made on the date when the employer's second-quarter OASDI tax is due. The special rule, under which the payroll tax holiday doesn't apply for wages paid during the first quarter, will allow time for the IRS to issue guidance and for employers to adjust their payroll systems accordingly.

Please contact your local Yeo & Yeo tax professional if you would like to discuss this further.