A client asked me if they hired their wife to work in their business if they qualified for the payroll tax holiday. First I had to look up how the payroll tax holiday worked. Qualified employers are exempted from paying the employer 6.2% of Social Security employment taxes on wages paid in 2010 to a newly hired qualified individual. A qualified employer is any employer other than the U.S., a state, or a political subdivision of a state. However a public institution of higher education is a qualified employer even though it is a government institution. A qualified individual is one who:
1. begins employment with the employer after 2/3/10 and before 1/1/11.
2. certifies by signed affidavit, under penalties of perjury, that he or she hasn’t been employed for more than 40 hours during the previous 60 days.
3. does not replace another employee of the employer.
4. is not related to the qualified employer in a way that would disqualify the individual for the work opportunity tax credit.
The payroll tax holiday only applies to wages paid with respect to employment beginning 3/19/10 and ending on 12/31/10. The payroll tax holiday can be elected out of. Presumably one would elect out of the payroll tax holiday if the work opportunity tax credit would be a better deal and since you can’t have both credits you will need to choose.
Ok so now back to the question, can a business owner hire a spouse? It appears that #4 would be the hang up. If you look at the rules surrounding the work opportunity tax credit you will find that it casts a very wide net in preventing related parties from qualifying but it does not include a spouse within its rule. And if you look at the instructions for the new FormW-11 (the form newly hired but formerly unemployed workers must sign) the restrictions do not mention spouses. One would think that if they IRS meant to ban spouses from qualifying the business owner from receiving the payroll tax holiday credit then it would have specifically mentioned it on the new form.
Depending on family relationships, there may be situations where a spouse will not qualify. Let’s say that Dad owns 60% of a corporation and Son who runs the company owns the other 40%. The corporation cannot claim the payroll tax holiday credit if it hires the son’s wife. The wife is treated as “related” to a more than 50% owner of the qualified employer and therefore is ineligible under the work opportunity tax credit rules. So be careful and check with your tax accountant before hiring your spouse just to receive this credit.