The emergency tax legislation passed in response to COVID-19 significantly impacted payroll, payroll taxes, and related credits. The main purpose of the legislation was to get cash into the hands of employees. As such, government funding of payroll was key. Significant funding occurred via payroll tax credits and a forgivable loan program. This article outlines four main payroll tax relief provisions: The Paycheck Protection Program, the Employee Retention Credit, Paid Sick Leave Credit, and Payroll Tax relief for Employers.
Four main payroll tax relief provisions
1. Paycheck Protection Program Loan Under the CARES Act
To provide forgivable emergency loans, Congress created the Paycheck Protection Program (PPP). The PPP provided for recipients to spend at least 75% of the loan proceeds on payroll costs for employees for a period of eight continuous weeks. Additionally, recipients under this program may spend the remainder of the loan balance on other qualified expenses. In other words, the goal is to provide forgiveness of the loan to the extent that the loan proceeds were spent on qualified expenditures. A few items of note:
- Salary was capped at an annualized salary of $100,000 per employee.
- Payroll costs include gross pay, state employer taxes, group health insurance premiums, retirement benefits, vacation pay, and leave pay.
- Other qualified expenses include rent, mortgage interest, and utilities.
- The first round of PPP funding was quickly exhausted. At this writing (May 29, 2020), the SBA has re-opened the application link (see below).
- This emergency loan program requires that the borrower applies through an SBA lender when making the PPP loan application.
For a more detailed description of qualified loan expenditures and related PPP loan forgiveness, please see our related article, What Do I Need to Know About PPP Loan Forgiveness?
Update ALERT: See our article, Update to the PPP Loan Forgiveness Ruled and the new PPP Loan Application Deadline.
2. Employee Retention Credit Under the CARES Act
If a business is ineligible or unable to obtain funding under the Paycheck Protection Program, an employee retention credit may provide relief. For instance, the employer is considered eligible if the government suspended operations because of COVID-19. The CARES Act also considers an employer eligible if the business experienced a significant decline in gross receipts.
The credit is calculated and applied based on the following rules:
- The credit is 50% of qualified wages up to $10,000 paid in 2020. Thus, the credit tops out at $5,000 per employee.
- The credit is claimed against payroll taxes (on Form 941). Excess credits are refundable by filing Form 7200.
The definition of eligible wages depends upon the number of full-time equivalent employees (FTEs):
- If you averaged more than 100 full-time employees, then only the wages of those you retain who are not working may be claimed.
- If your headcount was 100 or fewer full-time employees, then you may claim wages for all employees whether working or not.
3. Paid Sick & Family Leave Credit
The Families First Coronavirus Response Act has two categories of emergency paid leave:
- Paid Sick Leave – This is allowed for up to 10 days (two work weeks) with an 80-hour cap for full-time employees; and
- Expanded Family and Medical Leave – This is allowed for up to 10 weeks. This emergency pay is available after taking the paid sick leave for employees who have been employed at least 30 days under the 5th criteria mentioned below.
Eligible employees– All employees of private employers with 500 or fewer employees are eligible for the Paid Sick Leave. The length of employment is not a factor for eligibility. Under the law, employees will be eligible if they are unable to work or telework due to the following criteria:
- The employee is subject to a government quarantine or isolation order related to COVID-19;
- A health care provider advised the employee to self-quarantine due to concerns about COVID-19;
- The employee is experiencing symptoms of COVID-19 and is seeking medical care;
- The employee is caring for an individual described in 1 or 2 above;
- The employee is caring for a child of the employee because the school or place of childcare has been closed, or the childcare provider is unavailable due to COVID-19 precautions;
- The employee is subject to similar conditions specified by the Secretary of Health & Human Services (in consultation with the Treasury Secretary and the Labor Secretary.)
Merely closing a business that lacks work does not qualify an employee under these rules. In contrast, an employer of fewer than 50 employees may opt-out if the paid leave requirements would jeopardize the viability of the business as a going concern.
The CARES Act caps pay for leave time for criteria 1 and 2 above at $511 per day (or $5,110 in aggregate per employee). For criteria 4-6 above, the pay is at 2/3 of normal compensation, capped at $211 per day (or $2,000 in aggregate per employee).
In exchange, the employer receives 100% reimbursement for the paid leave in the form of a payroll tax credit.
Important items to note include:
- Health insurance costs are included in the credit.
- Employers have no payroll tax liability on the sick leave payments.
- Self-employed individuals receive an equivalent credit.
- The credit is claimed as an immediate dollar-for-dollar offset against payroll taxes.
- Any excess is refundable “as quickly as possible” by the IRS through new Form 7200.
Employee Retention Credit vs. Paycheck Protection Program Loan Forgiveness
A business may not claim both the Paycheck Protection Program loan forgiveness and the Employee Retention Credit. Also, a business may not use the same wage dollars for the Employee Retention Credit and the Paid Sick Leave Credits.
4. Payroll Tax relief: Delay of Employer Payroll Taxes Under the CARES Act
Any employer may defer payment of the employer portion of social security tax deposits normally due March 27, 2020 through December 31, 2020, until the applicable date. This applicable date for 50% of the deferred taxes is December 31, 2021. The applicable date for the remaining balance of deferred taxes is December 31, 2022. Note that any employer who has a loan forgiven under the Paycheck Protection Program may not defer any payroll taxes incurred after the date of forgiveness. This deferral also applies to self-employed individuals. Self-employed individuals may defer payment of 50% of the social security tax on net earnings from self-employment.
The various COVID-19 related tax provisions provide multiple paths to put cash into the hands of employees. Similarly, these provisions help businesses survive the short-term difficulties associated with the economic effects of COVID-19. There are complex rules around using some of these provisions at the same time or on the same dollars. Our team of professionals can clarify the rules and help you to navigate the complexities. Fill out the contact information form and we will answer your concerns with a free, no-obligation consultation.
Meet the Author
Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.
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