Two COVID-19 legislations give generous tax incentives for employers through a payroll tax. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) were signed on March 27, 2020, it was a supplement to Families First Coronavirus Response Act (FFCRA), signed March 18, 2020.
The payroll tax provisions in both legislations are:
Employee Retention Credit: A maximum of $5,000 refundable payroll tax credit per employee for employers that retain employees.
Deferral of payroll tax for Employer: Deferral of an unlimited amount of employer Social Security taxes to the end of 2021 and 2022.
Paid sick leave credit: A refundable payroll tax credit equal to payments of the new required sick leave.
Paid family leave credit: Payroll credit for required family leave: A refundable payroll tax credit equal to any payments of the new required family leave.
Each of these incentives is designed for employers to increase their access to cash. The CARES Act has also started a new Payroll Protection Program (PPP), administered by the Small Business Administration, to provide loans to businesses with less than 500 employees.
While these tax incentives give needed relief for businesses, they have also caused a lot of uncertainty about their application and working with most small business loan programs.
We will try to clarify the problems and confusion raised because of this situation by an analysis of each of these incentives. However, it is important to emphasize that all these reports and credits are complicated. It is advisable to outsource this to payroll experts and tax professionals so that you can maximize the benefits and avoid the costs of trial and error and penalties.
Employee Retention Credit (CARES Act)
The CARES Act created this to reward companies that keep on paying employees affected by the novel COVID-19 outbreak. This credit is for certain eligible companies and is calculated as 50% of a maximum $10,000 of pay per eligible employee that is paid during the period of March 12, 2020, up to Dec. 31, 2020.
Companies Eligible for the retention credit:
Businesses that are Section 501(c) eligible, trading or doing business during 2020 are allowed the credit. These Businesses would also have to prove economic loss from the pandemic in the form of
1) Suspension of business due to government order affecting travel, commerce, and group meetings due to the pandemic.
2) Reduction in Gross Sales of more 50% in a calendar quarter, when compared to the same quarter the last year.
Suspension of Business
Suspension of business must be due to instructions from any level of government with jurisdiction over the employer’s operations. The instructions should be mandatory and not optional. In the case of a geographically spread out employer, relevant areas would be affected by the government order.
This means that the employer can apply for the government orders according to its discretion and treat either all its locations as fully or partially suspended or continue operations in areas that do not fall under the jurisdiction of the government order. In both cases, the business will be considered partially shut down under government directives.
There are other criteria for assessing suspension of business that would require a lot of further detail and it is advisable that businesses seek recourse with payroll experts and tax professionals to help them maximize their credits and costs of penalties.
In general, an employer that is fully or partially suspended, regardless of its location and position in the industry value chain will remain eligible until it is no longer suspended because of the government instructions.
Reduction in Gross Receipts
Regardless of the suspension on business criteria, if a business meets the gross sales reduction test, it will be eligible. This means that as long as the sales receipts exceed 80% of the same calendar quarter the previous year, the business is eligible. There is no requirement to prove that the reduction in business is due to a government order or COVID-19. This would only be applicable up to Dec. 31, 2020.
This is an item that most businesses generally record or have to report for tax purposes. This may require additional accounting and tax working to work out the values of gross sales in the relevant quarters of 2019 and 2020.
Businesses will also have to wait for the quarter to end to figure out their eligibility unless they are also eligible under the suspension of business criteria.
The IRS is also going to publish guides that will help the eligible tax-exempt businesses to calculate their gross sales for this requirement.
not eligible for the retention credit if any member of the employer’s aggregated group receives a PPP loan.
Federal, state, and local governments, subdivisions, and agencies are not eligible to claim the credit. Certain tribal governments may be eligible with respect to business operations.
The number of healthcare expenses taken into account generally includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions. However, the expenses should not include amounts that the employee paid for with after-tax contributions. For employers with more than 100 employees, all healthcare expenses allocable to a time where an employee is not providing service can be included in qualified wages. For example, if an employer furloughs its employees but continues to pay their healthcare expenses, those healthcare expenses cannot be included in qualified wages even though no wages are being paid.
Amount of the Credit:
This is determined on an employee basis and would match 50% of the wages of employees. Eligible wages consider both full wages subject to FICA tax and costs for employer-provided healthcare. Qualified wages are capped at $10,000 per employee and have to be be paid from March 12, 2020, to December 31, 2020.
Employer Payroll Tax Deferral (CARES Act)
All businesses can delay the 6.2% FICA portion (which pertains to Social Security) of their employment taxes for any payroll paid from March 27, 2020, to Dec. 31, 2020. This allows employers to pay half (50%) of this deferred amount on Dec. 31, 2021, and the remaining half on Dec. 31, 2022.
An equal portion of self-employment taxes also qualifies for this deferral. Self-employed individuals can adjust their projected tax payments for 2020 to take this into account.
The IRS has published FAQs and the updated Form 941 and its instructions discussing a variety of rules. The IRS Coronavirus Tax Relief site will continue to be updated with all guidance on the payroll tax deferral.
Payroll credit for required paid sick leave (FFCRA)
Similar to the employee retention credit is the paid sick leave credit which is a refundable payroll tax credit. Credit is given for 100% of eligible sick leave pay given by an employer in 2020. These covers pay that an employer has to pay under FFCRA.
The 6.2% Social Security tax is entirely dropped off while the 1.45% Medicare tax is still applied, but an equal amount is added to the credit, nullifying its effect. This credit is meant to recompense the employer with respect to the wages that the FFCRA required it to pay.
Payroll credit for required paid family leave (FFCRA)
The family leave credit works similarly to the sick leave credit, as it also credits 100% of all pay and healthcare outflows that a business has to pay under the FFCRA. As per the rule, a business has to give up to $200 daily under the required paid family leave rule, and the tax credit is fixed at this number.
Only employees that are unable to work (including remote work) because of having to care for a child whose daycare or school is closed and childcare is unavailable due to the COVID-19 pandemic.
All pay above $200 is ineligible for this credit. Other healthcare expenses can be added to this $200 and can be supplemented by Medicare taxes due on wages. The maximum credit limit is $10,000, this is equal to 10 weeks of paid family leave @5 days/week multiple with $200/day provided by FFCRA). You have to add healthcare expenses and medicare tax.
All of the clauses that apply to the sick leave credit also applies to the paid family leave credit. This covers how the credit is changed to cash, employee counting and totalling. It also considers the fact that eligible pay is covered by employer Social Security payments and the treatment of common-law employers and third-party payers.
How to claim Credit:
Eligible businesses file their total eligible wages for the Employee Retention Credit for each calendar quarter on their federal employment tax returns (Form 941, Employer’s Quarterly Federal Tax Return)
Businesses list qualified sick leaves (if any) and qualified family leave wages (if any) for which they can claim a credit under FFCRA on Form 941. Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s share of social security and Medicare tax.
While we have tried to simplify these credits, they are complicated. It is better to consider outsourcing this process to payroll experts and tax professionals in order to maximize the benefits of this credit.
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