Payroll Tax Alert: New Benefits Under the CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Donald Trump signed into law March 27, contains two key potential payroll tax benefits for employers: (1) the Employee Retention Payroll Tax Credit (“Employee Retention Credit”) and (2) an optional delay of payment of the employer-portion of Social Security taxes (“Social Security Tax Deferral Program”). Please note that employers that receive forgivable SBA loans under the Paycheck Protection Program (“PPP Loans”), discussed here, are not eligible for either Employee Retention Credit or Social Security Tax Deferral Program. Stated another way, participating in the Employee Retention Credit or Social Security Tax Deferral Program may disqualify the employer from receiving PPP Loan or, at best, require an employer who subsequently receives a PPP Loan to repay the IRS for any benefit received under the Employee Retention Credit and/or Social Security Tax Deferral Program, plus penalties and interest. Therefore, until there is future guidance providing otherwise, we recommend any employer considering a PPP Loan refrain from participating in either the Employee Retention Credit or Social Security Tax Deferral Program.
That said, for employers either ineligible or for whatever reason, not otherwise seeking a PPP Loan (for example, an employer with over 500 employees that is not eligible for PPP Loans) the Employee Retention Credit and Social Security Tax Deferral Program may provide the employer with needed payroll assistance. Important information with respect to both programs follows:
Employee Retention Payroll Tax Credit (“Employee Retention Credit”) provides qualified employers a refundable payroll tax credit for 50% of up to $10,000 of wages, an allocable health plan expenses, paid to each qualified employee from March 13 – December 31, 2020 (potential $5,000 credit per employee). This credit is separate from the payroll tax credit available for the new mandatory paid sick and paid FMLA leave under FFCRA (“Mandatory Paid Sick and Childcare Leave”) discussed here and the Employee Retention Credit is not available on Mandatory Paid Sick and Childcare Leave wages paid under the FFCRA. Also, as previously mentioned, any employer that receives a SBA loan under the Paycheck Protection Program is not eligible for these payroll tax credits.
Other key details on the Employee Retention Credit are as follows:
- Eligible Employers: For a particular quarter, any employer (1) whose trade or business is fully or partially suspended during the calendar quarter because of a governmental order issued in response to the coronavirus outbreak that limited commerce, travel, or the size of group meetings, or (2) that has gross receipts in a particular calendar quarter in 2020 that are less than 50% of such receipts as compared to the same quarter in 2019. A business described in (2) continues to be eligible for the credit until the quarter following the quarter in 2020 in which its gross receipts exceed at least 80% of those during the same quarter in 2019.
- For example, if a restaurant was ordered to close its dine-in service but allowed to offer drive-through and take-out operations, the restaurant’s business would be partially suspended and generally eligible for the tax credit. Similarly, if a business had $100,000 in gross receipts for each of the 2nd -4th quarters of 2019, was fully operational but had gross receipts of only $49,000, $82,000, and $92,000 of the 2nd, 3rd and 4th quarters of 2020 respectively, the business would be generally eligible for the credit in the 2nd and 3rd quarters of 2020 (ineligibility does not occur until the quarter after the business exceeds 80% in receipts as compared to the prior year).
- Nonprofits In, Governments and Sole Proprietor Services Out: Nonprofits that are fully or partially shut down are generally eligible for the credit, but government employers and services provided by a sole proprietor are not are not eligible for the credit.
- Calculating the Credit: The Employee Retention Credit equals 50% of qualified wages and allocable health plan expenses paid to a qualified employee in a particular quarter, with a maximum of $10,000 of wages and health care expenses of per employee taken into account in 2020.
- Example: During 2020, a qualified employer pays $8,000 of qualified wages to a particular qualified employee in the 2nd Qtr and $7,000 in 3rd Qtr. The employer is eligible for a credit of $4,000 in 2nd Qtr and $1,000 in 3rd Qtr with respect to the employee ($5,000 total credit for the employee).
- Identifying an Employer’s Qualified Wages: Qualified wages/health expense eligible for credit depend upon the size of the qualifying employer. For qualifying employers that had greater than 100 full-time employees during 2019, qualified wages are those that an employer pays in 2020 during a qualifying quarter (closed, partially closed, significant decrease in receipts) to an employee that is not providing services (for example, the employee is furloughed but is still paid full salary). For employers with 100 or less full-time employees during 2019, qualified wages are those paid in 2020 during a qualifying quarter to an employee, regardless of whether the employee ceased providing services or continued to work.
- For Example, an employer is operating all of 2020 but has gross receipts of 48% for the 2nd – 4th quarter of 2020 as compared to the same quarter in 2019. If the employer had more than 100 employees in 2019, qualified wages are limited to those wages paid to employees in the 2nd – 4th quarters of 2020 that are not providing any services (e.g. paid not to work). If the employer has 100 or less full-time employees during 2019, all wages paid during these quarters would qualify (up to $10,000 per employee) whether or not the employee was providing services.
- No Double Dipping of Credits: Qualified wages for the Employee Retention Credit do not include:
- Mandatory Paid Sick and Childcare Leave wages taken into account for purposes of the payroll credits under FFCRA,
- Wages taken into account for the employer income tax credit for paid family and medical leave under section 45S of the Tax Code, or
- Wages in a period in which an employer is allowed a work opportunity credit under section 51 of the Tax Code.
- Interplay with FFCRA Mandatory Paid Sick and Childcare Leave: Although the Employee Retention Credit cannot be claimed on Mandatory Paid Sick and Childcare Leave wages paid under FFCRA, other wages paid to the employee may be eligible. For example, where an employee returns from such Mandatory Paid Sick and Childcare Leave and is subsequently furloughed with pay.
- Credit is Paid as an Offset to Employer-Share Social Security Tax: The credit is paid as a reduction in the employer portion of Social Security Taxes otherwise owed to the IRS. If the employer portion of Social Security is insufficient to cover the credit due to the employer, the employer will receive a refund on the employers’ employment tax return for the quarter.
- Qualified Wages Can be Funded in Part with Employment Taxes: A qualified employer that pays qualified wages in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment tax (Social Security, Medicare, Income Tax withholding) it deposits for that quarter by 50% of the amount of qualified wages paid in that quarter. The reduction in employment taxes remitted to the IRS will be accounted for on the employer’s quarterly employment tax return. If the federal employment taxes withheld for the quarter are insufficient to cover half of the qualified credits, the employer may apply to the IRS for an expedited refund on Form 7200.
- Example: An qualified employer paid $20,000 of qualified wages and is due a $10,000 Employee Retention Credit. The employer did not pay any Mandatory Paid Sick and Childcare Leave. The employer withheld $8,000 of employment taxes on all employees’ wages during that quarter. The employer may retain all $8,000 of withheld taxes and apply to the IRS for a refund of $2,000 on Form 7200.
Delayed payment of employer payroll taxes . Separate from the Employee Retention Payment, employers can defer paying the 6.2% employer share of certain payroll taxes through the end of 2020. Amounts deferred will be due to the IRS in two equal installments, one at the end of 2021, the other at the end of 2022. This program is available to self-employed individuals but is not available to any business that has debt forgiveness under the CARES Act Payroll Protection Program.
For employers with over 500 employees or are otherwise ineligible or not considering a forgivable PPP Loan, the Employee Retention Credit or Social Security Tax Deferral Program can provide much-needed payroll assistance to qualifying employers.