What Is the Payroll Tax Credit?
The payroll tax credit is a tax exemption for eligible employers. The tax credit reduces the burden of Social Security tax paid by qualifying employers.
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Definition
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The payroll tax credit is an employer tax exemption taken from the 6.2 percent Social Security tax that employers are required to pay.
Qualifications
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Both taxable and tax-exempt businesses and organizations qualify for the payroll tax credit if they hire qualified employees. Businesses must be in the United States or U.S. territories and must be subject to federal social security taxes. While public colleges, universities and American Indian tribal governments qualify for the credit, government employers aren't eligible. Neither are household employers.
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Employees
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Employees must have been unemployed, or employed for 40 hours or less, for 60 days before the start of their employment with the qualifying employer. They can't be related to the employer.
Considerations
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For an employer to claim the tax credit, qualified employees must sign an affidavit stating their eligibility. The employer must claim the exemption using Form 941. The credit can be taken during the employer's quarterly tax returns.
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