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Payroll Tax Credits under COVID-19 Relief Programs

April 7, 2020 by

So you’ve heard about “payroll tax credits,” but which end is really up?

Below is a summary of the various credits available, and which can be combined with other available benefits.

First, it is important to understand that there are three different credits available. The first two are corresponding credits to required paid sick leave and paid family leave under the Families First Coronavirus Response Act (“FFRCA”). The third is an Employee Retention Credit available under the CARES Act.  In addition to the credits available, there is also an advanced refund available with respect to the credits, and a payment deferral available with respect to payroll taxes regularly due.

Sick Leave Credit under FFRCA

  • Employers with fewer than 500 employees (including tax-exempt organizations) are eligible for a tax credit against the Old-Age, Survivors, and Disability Insurance portion of FICA (i.e. the 6.2% Social Security portion of payroll tax).
  • Credit is available in an amount equal to 100% of qualified sick leave wages paid by the employer, subject to the limitations below, paid for leave taken between April 1, 2020 and December 31, 2020.
  • Qualified sick leave wages are the employee’s regular wages, required to be paid under FFRCA, up to a maximum of $511 per day for up to ten days (per employee), in the event of the following:
    • The employee is under a quarantine or isolation order related to COVID-19;
    • The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
    • The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
  • Qualified sick leave wages are also two-thirds of the employee’s regular wages, required to be paid under FFRCA, up to a maximum of $200 per day for up to ten days (per employee), in the event of the following:
    • The employee is caring for an individual who is subject to a quarantine or isolation order related to COVID-19 or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
    • The employee is caring for his or her child if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, due to COVID–19 precautions.

Family Leave Credit under FFRCA

  • Employers with fewer than 500 employees are also eligible for a tax credit against the 6.2% Social Security portion of payroll tax in an amount equal to 100% of qualified family leave wages paid by the employer up to an aggregate of $10,000 in wages (per employee).
  • Qualified family leave wages are the wages paid under the expanded FMLA portion of FFRCA in an amount of two-thirds of the employee’s regular wages, capped at $200/day, in the event of the following:
    • The employee is caring for his or her child if the school or place of care of the child has been closed, or the child care provider of such child is unavailable, due to COVID–19 precautions.

In the event that either the Sick Leave Credit or the Family Leave Credit available exceeds the employer’s tax liability (against which it is creditable), it is refundable (i.e. employer will receive a dollar for dollar tax refund with respect to the excess).  Wages eligible for the credit will not be double counted, so the same wages are only available for one credit, but employers are eligible for multiple credits with respect to different wages.  In addition, the payroll tax eligible for the credit is treated as an addition to gross income; however, if the employer is otherwise eligible to deduct its portion of the social security tax on all wages, the correct deductible amount is calculated before reduction by the tax credits. Similar credits are available for self-employed individuals.

In order to take these credits, employers must substantiate eligibility by retaining records supporting each employee’s leave. Further guidance on which records will satisfy the IRS’ substantiation requirements can be found here.

These credits may be claimed on the Employer’s employment tax return, Form 941 (or other employment tax return, if applicable).  To claim the advanced refund, see below.

Employee Retention Credit under CARES Act

  • Employers (including tax-exempt organizations) are eligible for a refundable payroll tax credit equal to 50% of certain wages paid if their operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings, or who have experienced a reduction in quarterly receipts greater than 50% (compared to the gross receipts for the same quarter in 2019).
  • The credit is available for the first $10,000 of eligible wages per employee (for a credit of $5,000 per employee). Employees do not need to be sick or a caretaker to claim this credit; however, sick leave and family leave wages paid pursuant to FFRCA are not included in the wages eligible for the Employee Retention Credit.
  • For businesses with 100 or fewer employees, the credit is available for all employee eligible wages paid between March 13, 2020 and December 31, 2020, but for businesses with more than 100 employees, the credit is only available for wages of furloughed employees or wages paid for time employees with reduced hours are not providing services.
  • This credit is not available to employers who receive a Paycheck Protection Program SBA loan.

In the event the Employee Retention Credit available exceeds the employer’s tax liability (against which it is creditable), it is refundable (i.e. employer will receive a dollar for dollar tax refund with respect to the excess).  Wages eligible for the credit will not be double counted, so the same wages are only available for one credit, but employers are eligible for multiple credits with respect to different wages.

This credit may be claimed on the Employer’s employment tax return, Form 941 (or other employment tax return, if applicable); however, the IRS has issued guidance advising employers to included 50% of any qualified wages paid between March 13, 2020 and March 31, 2020 on Form 941 for Q2 to claim the Employee Retention Credit.  To claim the advanced refund, see below.

Advanced Refund of Paid Sick Leave, Paid Family Leave Credit, or Employee Retention Credit

  • The CARES Act provides for an advanced refund of the tax credits discussed above, meaning the refund can be claimed prior to the payment of the corresponding payroll taxes due.
  • To claim the advanced refund, employers should complete Form 7200. You may file at any time before the end of the month following the quarter in which you paid the qualified wages. For example, Form 7200 for Q2 2020 can be filed any time before July 31, 2020.  If necessary, you can file multiple times during each quarter. Do not file Form 7200 after you file Form 941 for the fourth quarter of 2020, and do not file the form to request an advance payment for any anticipated credit for which you already reduced your deposits.
  • Employers will not be subject to a penalty for failing to deposit federal employment taxes relating to wages qualified for a credit if:
    • The employer paid qualified wages to its employees in the calendar quarter before the required deposit;
    • The amount of federal employment taxes that the employer does not timely deposit, is less than or equal to the amount of the employer’s anticipated credits for the qualified wages for the calendar quarter as of the time of the required deposit; and
    • The employer did not seek payment of an advance credit by filing Form 7200.
  • Form 7200 and applicable instructions can be found here.

Payment Deferral

  • Employers and self-employed individuals are eligible to defer payment of the employer portion of certain payroll taxes (social security). 50% of the deferred amount will need to be paid on December 31, 2021, and the remaining 50% of the deferred amount on December 31, 2022.
  • To date, the procedure to elect deferral has not yet been released.
  • This deferral is not available to employers who receive loan forgiveness under the Paycheck Protection Program SBA loan.

 

The information contained in this alert is provided for informational purposes only. It should not be construed as business, legal, accounting, tax, financial, investment or other advice on any matter and should not be relied upon for such.

The information in this alert may not reflect the most current developments as the subject matter is extremely fluid and may change daily. The content and interpretation of the issues addressed herein is subject to revision. Trenam Law  disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this document to the fullest extent permitted by law. Do not act or refrain from acting upon the information contained in this document without seeking professional or other advice.