Payroll Credits and Deferral Options Provide Much Needed Relief
Update: This article has been updated with the latest guidance as of April 13.
The initial uncertainties brought by the outbreak of COVID-19 are now manifesting themselves in the business community as cash flow issues, financing pressure, and even threats to business continuity. To help mitigate the economic impact of this crisis, the federal government has provided payroll relief options that businesses can and should leverage when possible, including payroll tax credits and the option to delay payment of certain payroll taxes.
Employee Retention Credit
On March 27, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Among other legislation, the CARES Act includes a payroll tax credit for businesses impacted by COVID-19 to incentivize employee retention.
The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021. The credit is calculated on a quarterly basis, is applied against the employer’s 6.2% portion of Social Security payroll taxes, and is refundable. While the credit is equal to 50% of the qualified wages paid to each employee, qualified wages are capped at $10,000 annually; meaning, the credit is capped at $5,000 per employee.
In order for wages to qualify for this credit, first the employer must qualify as an eligible employer for the quarter the wages pertain to. Secondly, the wages themselves must be qualified wages. Third, the employer cannot receive a loan pursuant to the Paycheck Protection Program.
Whether an employer is eligible for this credit is determined on a quarterly basis. An employer can qualify in two ways:
- The business was fully or partially suspended during the quarter due to orders from a governmental authority due to COVID-19, or
- The business experienced a decline in gross receipts.*
For employers that employed an average of greater than 100 full-time employees during 2019, qualified wages are those paid to employees who were not providing services due to item numbers 1 or 2 above. Qualified wages cannot exceed the amount the employee would have received for working the equivalent duration during the 30 days immediately prior.
For employers who did not employ an average of greater than 100 full-time employees during 2019, qualified wages are those paid to an employee during the qualifying period discussed in numbers 1 or 2 above.
Wages of owners who control the company (directly or indirectly) do not qualify for the credit.
The IRS has issued FAQs regarding the implementation of the Employee Retention Credit. The FAQs provide a variety of additional guidance and details, including confirmation that employers can retain the total allowable credit amount from required payroll tax deposits. The credit can be retained from withheld federal income taxes and both portions (employee share and employer share) of Social Security and Medicare taxes with respect to all employees. If there are not sufficient payroll taxes to cover the full credit amount, the employer can file Form 7200 to claim an advance credit for the allowable credit amount in excess of the employer’s total payroll tax deposits.
A number of caveats and special rules apply to this credit, so it is important to contact your KSM advisor for applicability to your business situation.
Delayed Payment of Payroll Taxes
Also included in the CARES Act is the ability for employers to defer payment of the employer portion of Social Security payroll taxes (6.2%) for payroll tax deposits due March 27, 2020, to Dec. 31, 2020. All employers and self-employed individuals are eligible for the deferral. However, once a taxpayer who obtained a loan under the Paycheck Protection Program is notified by their lender that they will experience loan forgiveness, the taxpayer is not allowed to defer future employer taxes due.
The deferred employer payroll taxes are due in two equal installments, 50% due by Dec. 31, 2021, and the remaining 50% due by Dec. 31, 2022.
Self-employed individuals can defer 50% of the Social Security portion of the self-employment tax. The portion not being deferred is taken into account for purposes of determining quarterly estimated tax requirements.
It is important to note that the employer, not a Professional Employer Organizer (PEO) or other third party, is solely liable for the payment of any employment taxes. Employers direct such third parties to defer under this provision.
Families First Payroll Tax Credit
Prior to the enactment of the CARES Act, the Families First Coronavirus Response Act (FFCRA) was signed into law, which provides employers with a payroll tax credit designed to offset the cost of providing additional paid leave. The credit can be taken in addition to the employee retention credit included in the CARES Act; however, wages taken into account for the payroll tax credits under the FFCRA do not qualify for the CARES Act’s Employee Retention Credit.
Guidance provided on this credit also allows employers to retain the total allowable credit amount from required payroll tax deposits. If there are not sufficient payroll taxes to cover the full credit amount, employers can file Form 7200 to claim an advance credit for the excess
We encourage all businesses to contact their payroll tax provider to ensure procedures are in place to properly claim this credit.
For questions, please reach out to your KSM advisor or complete this form and one of our professionals will be in touch.
*A company qualifies for the credit for the following period:
- Starting with the first calendar quarter in 2020 for which gross receipts are less than 50% of the gross receipts for the same quarter in 2019; and
- Ending with the quarter following the first quarter in which gross receipts are greater than 80% of gross receipts for the same quarter in 2019.
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