Everybody is talking about the Loans available to small business owners for disaster relief. I want to make sure that you are also aware of the several tax incentives for employers through the payroll tax system.
The CARES Act included the following tax provisions:
- Employee retention credit: A $5,000 refundable payroll tax credit for certain employers that retain employees.
- Employer payroll tax deferrals: Deferral of an unlimited amount of employer Social Security taxes to the end of 2021 and 2022.
- Payroll credit for required sick leave: A refundable payroll tax credit equal to any payments of the new required sick leave.
- Payroll credit for required family leave: A refundable payroll tax credit equal to any payments of the new required family leave
While it is great that small businesses have so many options, there is a great deal of confusion regarding who should apply for what. When the CARES Act first came out the SBA encouraged those in the financial industry to have our clients to apply for everything. Which we did. The idea was akin to throwing spaghetti at the wall and seeing what fit. However, now that the SBA and the rest of America has come to the realization that the instant aid that was promised isn’t going to be so instant, we are rethinking our strategies. The truth is that the application of the incentives and their interaction with each other can be complicated. In some cases, the utilization of one program precludes the use of others to avoid double dipping.
I have discussed the specifics of the Paycheck Protection Program and the Economic Injury Disaster Loan in a previous document, so this article is limited to the tax incentives that were included in the CARES ACT.
Employee retention credit
The employee retention credit is available to eligible entities and is equal to 50% of qualified wages paid after March 12, 2020, through Dec. 31, 2020; up to $10,000
Who is eligible?
Entities which are either carrying on a trade or business or 501(c) organizations operating during 2020 and are directly affected by COVID-19 are entitled to the credit.
“Directly affected” means that operations must be fully or partially suspended as a result of a government. For businesses, there must be a greater than 50% reduction in gross receipts for a quarter when compared to the same quarter in the previous year.
For an entity that is fully or partially suspended, it will remain eligible only until it’s no longer suspended. “Partially suspended” is not spelled out within HR 748. However, the IRS defines it as circumstances where a business can continue to operate but not at its normal capacity. This is one of the many areas where future determination is needed.
For the gross receipts test, a business remains eligible through any quarter in 2020 during which gross receipts exceed 80% of the gross receipts from the same quarter in 2019. Obtaining proper data for this test may require additional assistance from your accounting and/or tax professional. Further, an entity will not know whether it will fall below the 50% threshold until the quarter is complete so it may have to delay the application of the credit unless it also qualifies as fully or partially suspended during the quarter.
Who is NOT eligible for the credit?
The CARES Act created a new Paycheck Protection Program to provide loans to businesses with less than 500 employees. Employers that receive this new type of loan are not eligible for the employee retention credit. The CARES Act directs the Secretary of Treasury to create rules for recapture of the credit, which suggests that even if this loan is received after the employee retention credit has been received, the credit must be repaid. There is no guidance to indicate whether interest and penalties may be due on these repayments. Additionally, federal, state, and local governments, subdivisions, and agencies are not eligible to claim the credit.
How much is the credit?
The credit is determined on a per-employee basis and is equal to 50% of “qualified wages” with respect to eligible employees. Qualified wages include both wages subject to FICA tax as well as costs for employer-provided health insurance. Qualified wages cannot exceed $10,000 per employee. In addition, qualified wages must be paid between March 13, 2020 and December 31, 2020.
The rules for determining qualified wages differ depending upon whether the employer had more or less than 100 employees on average during 2019.
- Employers with 100 or fewer employees:Qualified wages include all wages paid to all employees during any quarter that the employer is an eligible employer; subject only to the $10,000 limit per employee.
- Employers with more than 100 employees:Qualified wages only include wages that are being paid to employees that are not performing services due to a government-ordered limitation or the loss of business income. Any increase in wages paid while an employee is not working will not be included in the credit calculation.
Will the credit have an impact on taxable income?
If the employer is a taxable entity, the amount of the credit must be included in the employer’s taxable income. As a result, the net benefit of the credit is reduced by the entity’s marginal tax rate. Still, the business is permitted to obtain the full cash benefit of the credit through the payroll tax system, and any additional income tax is paid through estimated taxes, which may not be due until much later than when the credit is received. The impact of this income adjustment may also be deferred to the extent that it reduces net operating losses that cannot be carried back because income does not exist in the previous five years.
The handling of this issue by states will vary depending on the states involved. Many states permit a subtraction for the increase to income resulting from employment-related federal tax credits, but it’s possible that some states would need to update their laws to cover this credit.
Where can I find more information?
Employer payroll tax deferral
Most employers can defer the 6.2% FICA portion of the employer’s employment taxes for any payroll paid on March 27, 2020 through Dec. 31, 2020. This rule permits eligible employers to pay 50% of the deferred amount on Dec. 31, 2021, and the remaining 50% on Dec. 31, 2022.
To provide relief to self-employed individuals, an equivalent portion of self-employment taxes is eligible for deferral.
Deferral of payroll taxes is not hindered if an employer participates in the Paycheck Protection ProgramUNLESS they qualify for loan forgiveness. So, if you defer tax payment on March 27 and later qualify for loan forgiveness you would have to repay all taxes deferred immediately. No guidance has been issued yet whether penalties and/or interest would be levied on deferred payments.
Payroll credit for required paid sick leave
Like the employee retention credit, the paid sick leave credit is also a refundable payroll tax credit
The credit is allowed in an amount equal to 100% of the qualified sick leave wages paid by the employer during 2020. Qualified sick leave wages only include those wages required to be paid by an employer under the Families First Coronavirus Response Act or FFCRA.
The explanation of the credit is complicated but in short, this credit is meant to entirely make the employer whole with respect to those wages that the FFCRA required it to pay.
In general, only employers with less than 500 employees are required to provide such sick leave.
The FFCRA requires an employer to continue the pay of employees that are:
- subject to a federal, state, or local quarantine isolation order related to COVID-19
- have been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19
- are experiencing symptoms of COVID-19 and are seeking a medical diagnosis.
In these instances, employers are not required to pay more than $511/day.
There is a pay cap of $200 for employees that are:
- caring for an individual subject to a quarantine isolation order or who has been advised to self-quarantine
- caring for the employee’s son or daughter if the school or place of care of the son or daughter has been closed
- the childcare provider of such son or daughter is unavailable due to COVID-19 precautions. In both circumstances, wages are only required to be paid with respect to a maximum of 10 days (or 80 hours) for all of 2020.
Amounts paid up to the stated limits as well as a share of healthcare expenses is creditable.
The maximum credit is $2,000 or $5,110, plus the amount of healthcare expenses allocable to those 10 sick days (plus the Medicare taxes on those wages as discussed above).
The amount of the credit is required to be included in the taxable income of the employer, which effectively negates the deduction claimed for the underlying wage and healthcare expenses.
Where can I find more information on this credit?
Payroll credit for required paid family leave (FFCRA)
Almost identical to the sick leave credit, the payroll credit for required paid family leave matches 100% of any wages and healthcare expenses that an employer is required to pay under the FFCRA.
However, the daily wage requirement here is only $200 and only employees who are unable to work (including telework) due to lack childcare, caused by COVID-19 are eligible.
The maximum limit is $10,000 plus healthcare expenses and the Medicare tax.
Where can I find more information about this credit?
Once again, I must state that I am not an expert. Comments laid out here are my interpretation of the tax incentives contained within the CARES Act. This article does not contain all clauses and conditions of these tax incentives. My intent is simply to make you aware of what relief options are at your disposal. I strongly urge you to work closely with your accountant and/or tax professional to determine the strategy that is best suited to your situation. If you would like to read the entire HR 748 text, you may access it HERE.