Payroll Tax Credits and Deferrals for Employers Offered Under the CARES Act
Co-authored by Matt Landon
Updated as of April 4, 2020
This article was updated on April 4 to note that a second method of obtaining the Employee Retention Credit is now available. In lieu of Form 941, Form 7200 may be used to obtain refunds faster, or in cases where the credit exceeds the amount that otherwise would be deposited with Form 941.
This article is supplemented by the following subsequently-published BNN articles addressing the Employee Retention Tax Credit:
- ERTC benefits are enhanced for 2020 (can be paired with PPP loans) – published January 5, 2021
- Clarification of some ambiguities in 2020 enhanced credit – published March 2, 2021
- ERTC is extended into 2021 with different features and qualifications – published January 7, 2021
On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security (CARES) Act, which provides for delayed payment of certain employer payroll taxes as well as a credit against payroll taxes for employers subject to COVID-19 related closures.
Employee retention credit
The CARES Act provides eligible employers with a credit against their Section 3111(a) payroll taxes equal to 50% of the qualified wages paid to each employee in a quarter, up to a maximum of $10,000 in wages. The retention credit is applicable for qualified wages paid from March 13, 2020 through December 31, 2020. The credit is applied against the employment taxes owed as reduced by other credits (including the employment credits from the Families First Coronavirus Response Act) but in the event the Employee Retention Credit exceeds the employment taxes for the quarter, the excess amount will be refunded to the employer.
The credit will be administered through the filing of quarterly payroll tax Form 941. However, a second method of obtaining the Employee Retention Credit is now available. Notice IR-2020-62 explains that in lieu of Form 941, Form 7200 may be used to obtain refunds faster or in cases where the credit exceeds the amount that otherwise would be deposited with Form 941. The wage cap limits the overall credit to $5,000 per employee in total, regardless of how many quarters the employee works. The credit reduces only the employer’s 6.2% Social Security tax. It does not apply to the 1.45% Medicare tax.
Employers are eligible for the credit if they meet one of two tests. First, they are eligible if they were carrying on a trade or business during calendar year 2020 whose operations were fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. Second, they are eligible starting with the quarter in which they experienced a decline in gross receipts of at least 50% for the calendar quarter as compared to the same calendar quarter in the prior year, and ending with the first calendar quarter beginning after a calendar quarter in which gross receipts are greater than 80% of the gross receipts for the same calendar quarter for the prior year.
For employers with 100 or fewer employees, the credit takes into account all qualified wages up to the $10,000 limit per employee. For employers with more than 100 employees, qualified wages are limited to only wages paid to employees who are unable to provide services.
Tax-exempt organizations that meet the first test described above (full or partial shutdown due to COVID-19) are eligible for the Employee Retention Credit.
In addition to being claimed on qualified wages, the credit can also be claimed for certain health plan expenses that are allocable to these wages.
For businesses considering applying for the forgivable SBA Loan under the Paycheck Protection Program, it is important to note that employers who receive one of these loans are NOT eligible to claim the Employee Retention Credit.
Delayed payment of employer payroll taxes
Another aspect of the CARES Act is the potential for employers to defer the 6.2% employer portion of the Social Security tax. Medicare taxes (as well as federal income tax withholding) are not deferred under these provisions. The payroll tax deferral period extends from March 27, 2020 until December 31, 2020. 50% of the deferred taxes must be deposited by December 31, 2021, and the remaining 50% must be deposited by Dec. 31, 2022.
Self-employed persons can take advantage of this relief provision. A sole-proprietor or an individual who is a service partner of an entity taxed as a partnership can adjust his or her estimated tax payment liabilities for the reduction in the employer portion of their social security tax otherwise due. This may provide a much needed cash flow injection back into small businesses that would otherwise be diverted to make tax distributions to cover this payment obligation. However, deferral means the business owner is still faced with liquidity and needs to pay these taxes down the road (hopefully when business prospects have changed for the better). Because the employer’s FICA tax is considered a tax on the employer, the liability should side-step the dreaded “trust fund recovery penalty” if these taxes continue to go unpaid due to continuing financial constraints.
Employers that use payroll service providers or Certified Professional Employer Organizations (CPEOs) and who direct such organizations to defer payment of any applicable employment taxes during the payroll deferral period will be held solely liable for any taxes that have been deferred.
Coordination with other CARES Act benefits
The CARES Act provides employers with a choice in the case of an otherwise eligible entity between (1) using the employee retention credit in conjunction with the payroll tax deferral, or (2) qualifying for an SBA forgivable loan to fund payroll costs.
BNN observation: It appears that the employee retention credit may be paired with the payroll tax deferral. However, the full benefits of the Payroll Protection Program cannot be paired with the employee retention credit or the payroll tax deferral. There are many open questions concerning the mechanics of this integration. One such question is whether eligible employers who elect to delay payroll taxes and subsequently find they would otherwise be approved for loan forgiveness need to accelerate payment on these delayed payroll taxes. Or, does opting to delay these tax payments eliminate any eligibility for loan forgiveness even before such determination period is complete? IRS guidance would be helpful and is expected. In the meantime, applicants for any of these programs should proceed with caution and become as familiar as possible with the interplay before proceeding.
Employers should work with their advisors to first determine whether they meet the definition of an “affected business” to see if the Employee Retention Credit is even an option. This requires an analysis of how businesses have been affected by COVID-19 and while the gross receipts test is fairly straightforward, the government shutdown test may not be and will likely require some additional regulatory guidance to help us navigate the myriad of situations businesses are facing. The following chart will help employers consider how the retention credit and payroll tax deferral function and co-exist.
|Employee/Employer Scenario||Employee Retention Credit||Payroll Tax Deferral|
|Available in Conjunction with SBA 7a Loan||No||No|
|Employer with 100 employees or FEWER||Credit calculated on ALL qualified wages paid after 3/12/20||Full Deferral|
|Employer with MORE than 100 employees||Credit calculated on qualified wages paid to employees not working due to COVID-19||Full Deferral|
|Business Financial Eligibility||Business must be shutdown by governmental order OR experience a 50% drop in revenue||Applies to all businesses regardless of the economic impact of COVID-19 or financial performance|
|Self Employed Person Eligibility||No||Yes – Employer Portion of SSDI (6.2%) may be deferred|
|Maximum Dollar Value Per Employee||$5,000 Credit – 50% of $10,000 MAX Applied on IRS Payroll Form 941 against ER Taxes. Excess Refunded||$8,537.40 – 6.2% of $137,700 SSDI base for 2020. Only applies to wages paid from 3/27/2020 to 12/31/2020|
|Interplay with Other Tax Incentives||Credit may not be claimed on wages paid for Sick Leave or FMLA under FFCRA||Employer portion of SSDI on any wages are eligible unless ERC is claimed on them|
|Regulatory Environment||Will require regulatory guidance and additional analysis to confirm eligible businesses and qualified wages||No additional guidance or analysis needed. Clear cut!|
Please consult your BNN tax advisor when considering which stimulus provision might be most advantageous for your business or if you have any other questions on the CARES Act.
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Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.