UPDATED: Additional Payroll Tax Credits for Small and Large Employers Under the CARES Act
UPDATED: Additional Payroll Tax Credits for Small and Large Employers Under the CARES Act
Updated April 2, 2020
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act provides payroll tax relief to certain businesses facing the COVID-19 crisis. The Families First Coronavirus Response Act (FFCRA) provides for payroll tax credits for small and mid-size private sector employers (500 or fewer employees) required to provide paid sick and expanded family and medical leave related to qualified payments made between April 1, 2020 and December 31, 2020. See our article about tax credits related to such leave payments.
The CARES Act offers separate types of payroll tax credits for all non-governmental employers for certain wages paid from March 13, 2020 through December 31, 2020, with respect to compensation paid to employees other than FFCRA-mandated leave, including payments to employees who are not providing services to the employer. The questions and answers below address how the CARES Act provides payroll tax credits to qualified businesses.
As under the FFCRA, the payroll tax credits provided under the CARES Act are not available to governmental employers. However, as noted below in Question and Answer 6, the extension of the due date for payment of employer FICA payments provided for in the CARES Act may offer some cash flow relief to governmental employers that participate in Social Security.
On March 31, 2020, the IRS issued several FAQs about tax credits for “Qualified Leave Wages” under the FFCRA and “Qualified Retention Wages,” the new tax credit under the CARES Act.
https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
Question 1: Which employers are eligible for the new CARES Act payroll tax credit?
Answer 1:
Private sector employers who receive a Small Business Interruption Loan, under the Paycheck Protection Program described in Section 1102 of the CARES Act, are not eligible for the payroll tax credits described below. The CARES Act instructs the IRS to provide for the recapture of these tax credits if an employer has taken these tax credits and later obtains a Paycheck Protection Program loan. See our Business Section Alert CARES Act: Paycheck Protection Loans and Eligibility for Forgiveness for more information about Small Business Interruption Loans.
In order to be eligible for the new payroll tax credits, a private sector employer must either:
- have had its operations fully or partially suspended during a calendar quarter in 2020 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; OR
- have had a more than 50% decline in gross receipts in any calendar quarter in 2020 compared to the same quarter in 2019, with eligibility ending when gross receipts for a quarter in 2020 are greater than 80% of the gross receipts in the same calendar quarter for 2019.
As described in Question and Answers 2 and 3 below, the calculation of the qualified wages for which the credit applies differs for employers depending on the average size of their full-time workforce. For this purpose, the average number of full-time employees will be determined as under the Patient Protection and Affordable Care Act (ACA) employer penalty provisions (Internal Revenue Code (Code) Section 4980H), which generally means full-time employees are those who work an average of at least 30 hours per week or 130 hours per month.
Question 2: How is the amount of the payroll tax credit available to non-governmental employers with an average of 100 or fewer full-time employees calculated?
Answer 2: The tax credit is equal to 50% of the qualified wages paid or incurred for employees and may be taken as a direct offset up to the amount of the employer FICA obligations for the quarter. For eligible employers with an average of 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order, and whether or not the employees are providing services to the employer during that time. An employer’s share of paid health plan expenses allocable to its employees for the period of time covered by the tax credit are also included in qualified wages for purposes of the tax credit. For purposes of the tax credit, qualified wages for each employee for all quarters may not exceed $10,000. The tax credit is available with respect to wages paid or incurred from March 13, 2020 through December 31, 2020.
The CARES Act provides that amounts employers pay to continue employees’ group health plan coverage while paying wages that are qualified for the tax credit are also included as eligible wages for purposes of the tax credit, to the extent the amounts are excludable from employees’ income under Code section 106, but those amounts appear to be subject to the $10,000 limit. Under the FFCRA, amounts employers pay to continue group health plan coverage for employees on emergency paid sick leave or emergency expanded family and medical leave are eligible for an additional tax credit above the dollar limits on salary that apply to limit the tax credit. We expect further IRS guidance on the calculation of the tax credits under both the FFCRA and the CARES Act, and we will provide a further Update to these Questions and Answers when that guidance is received.
This tax credit does not apply to any amounts paid to employees for emergency paid sick leave or emergency expanded family and medical leave for which the employer is receiving a tax credit under the FFCRA.
If the tax credit due the employer exceeds the amount of employer FICA tax due, the employer may treat the additional amounts as an overpayment and file for a refund for the additional amount due.
Question 3: How is the amount of the payroll tax credit available to non-governmental employers with an average of more than 100 full-time employees calculated?
Answer 3: The tax credit is equal to 50% of the qualified wages paid or incurred for employees and may be taken as a direct offset up to the amount of the employer FICA obligations for the quarter. For eligible employers with an average of more than 100 full-time employees, qualified wages only include wages paid to employees not providing services due to either reduced operations resulting from a governmental order limiting commerce, travel or group meetings, or a 50% or more decline in revenue in 2020 from the same quarter in 2019. The employer’s share of paid health plan expenses allocable to its employees for the period of time covered by the tax credit are also included in qualified wages for purposes of the tax credit. For purposes of the tax credit, qualified wages for each employee for all quarters may not exceed $10,000, and for employers employing an average of more than 100 full-time employees, the credit per employee may not exceed the amount that would have been paid to the employee for working an equivalent duration in the 30 days prior to such period. The tax credit is available with respect to wages paid or incurred from March 13, 2020 through December 31, 2020.
For employers with fewer than 500 employees, the tax credit does not apply to any amounts paid to employees for emergency paid sick leave or emergency expanded family and medical leave for which the employer is receiving a tax credit under the FFCRA.
If the tax credit due the employer exceeds the amount of employer FICA tax due, the employer may treat the additional amounts as an overpayment and file for a refund for the additional amount due.
The CARES Act provides that amounts employers pay to continue employees’ group health plan coverage while paying wages that are qualified for the tax credit are also included as eligible wages for purposes of the tax credit, to the extent the amounts are excludable from employees’ income under Code section 106, but those amounts appear to be subject to the $10,000 limit. Under the FFCRA, amounts employers pay to continue group health plan coverage for employees on emergency paid sick leave or emergency expanded family and medical leave are eligible for an additional tax credit above the dollar limits on salary that apply to the tax credit. We expect further IRS guidance on the calculation of the tax credits under both the FFCRA and the CARES Act and we will provide a further Update to these Questions and Answers when that guidance is received.
Question 4: How may employers be able to receive the payroll tax credit as an immediate dollar-for-dollar offset from payroll taxes otherwise payable?
Answer 4: Under the CARES Act, the employer would receive an immediate payroll tax credit as a dollar-for-dollar offset against employer payroll taxes that would otherwise be due. The IRS issued Information Release 2020-62 on March 31, 2020 which indicates that employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes in the same manner as the IRS is allowing for the tax credits under the FFCRA. The IRS previously issued Information Release 2020-57 indicating that the payroll tax credit provisions in the FFCRA allow employers to retain in the dollar-for-dollar offset amounts from federal income taxes and the employee share of Social Security and Medicare taxes withheld, as well as from the employer share of Social Security and Medicare taxes with respect to all employees.
Employers can also request an advance payment of the credits under both the FFCRA and the CARES Act. After reducing employment tax deposits to account for the credits, employers may request the amount of the credit that exceeds the reduced deposits either by filing Form 7200 or waiting for a refund when claiming credits on their employment tax return. On March 31, 2020, the IRS released Form 7200: Advance Payment of Employer Credits Due to COVID-19, and the draft instructions for Form 7200 for use by employers that file Forms 941, 943, 944, or CT-1. The Form 7200 may be used to request an advance of the tax credit for both the qualified sick and family leave wages and the employee retention credit.
Question 5: If an employer offsets the tax credit from the employer FICA tax and does not make the deposit of these employment taxes when they are normally due, will the employer incur a penalty for failing to timely deposit employment taxes?
Answer 5: No. The CARES Act specifically waives the failure to deposit penalty that would otherwise apply and allows the dollar-for-dollar reduction for amounts that would otherwise be required to be deposited by the employer for both the FFCRA tax credits and the CARES Act tax credits. The IRS has issued Notice 2020-22 providing penalty relief for employers who fail to deposit with the IRS federal employment taxes, including deposits of withheld income taxes, FICA taxes, and taxes under the Railroad Retirement Tax Act.
Question 6: Can employers (including governmental employers) defer payment of employer FICA taxes under the CARES Act?
Answer 6: Yes, unless the employer has had indebtedness forgiven under the CARES Act as described below. The CARES Act allows employers (including governmental employers who pay employer FICA tax) to defer payment of the employer share of the 6.2% Social Security payroll tax otherwise due on employee wages for the period from March 27, 2020 through December 31, 2020. The employer may extend payment of the employment taxes owed for such period over the following two years, with half paid by December 31, 2021 and half paid by December 31, 2022. Similar provisions allow the self-employed to defer payment of the 12.4% self-employment tax otherwise due on self-employment earnings for March 27, 2020 through December 31, 2020. Such amounts must be paid over the following two years, with half paid by the end of 2021 and the other half by the end of 2022.
This deferral of employer FICA taxes under the CARES Act does not apply to employers that receive loan forgiveness under the terms of the Small Business Interruption Loan program referred to as the Paycheck Protection Program under Section 1102 of the CARES Act, or employers that received similar loan forgiveness under section 1109 of the CARES Act under which the US Treasury, the Farm Credit Administration, and other federal financial regulatory agencies can authorize bank and non-bank lenders to make loans under the same terms as the Small Business Paycheck Protection Program.
For further information on the payroll tax credits available under the COVID-19 relief provisions of either the FFCRA or the CARES Act, please contact a member of the Hanson Bridgett Employee Benefits team.
