The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a refundable payroll tax credit of 50% of wages paid by eligible employers to retain employees during the COVID-19 crisis.
To be eligible for the credit, employers must have been carrying on a trade or business during 2020 and either of the following situations occurred in response to COVID-19:
- Operations were fully or partially shut down during a quarter in 2020 under orders from the local or federal government authorities, or
- Gross receipts decreased more than 50% during the quarter compared to the same quarter in the previous year.
An eligible employer can claim a credit on the qualifying wages paid to each employee each quarter, up to $10,000 per employee. Therefore, the maximum credit allowed per employee, per quarter will be $5,000 (50% of qualified wages). This credit only applies to wages paid after March 12, 2020 and before January 1, 2021. The credit will be claimed on the employment tax return on which the employer reports its liability for FICA or RRTA tax (e.g. Form 941 for FICA).
Qualified wages will largely depend on the average number of full-time employees the eligible employer had during 2019. Full-time employees average at least 30 hours per week. Qualified wages include qualified health plan expenses that are allocatable to those wages. Qualified health expenses are paid or incurred by the employer to maintain a group health care plan.
The following wages do not qualify for the employee retention credit:
- Wages paid to shareholders who own 50% or more of the employer corporation’s stock.
- Qualified sick and family leave wages paid under the Families First Coronavirus Relief Act (FFCRA), in which the employer claimed tax credits during the period April 1, 2020-December 31, 2020. In addition, any wages claimed for the FFCRA cannot be counted toward the employee retention credit, and vice versa.
The following employers are not eligible for the employee retention credit:
- Self-employed individuals, on their self-employed services and earnings.
- Employers who receive a covered loan under the Paycheck Protection Program.
- Governmental employers, including the U.S. and state/local agencies.
An employer may claim an advance payment of the retention credit by faxing Form 7200, Advance Payment of Employer Credits due to COVID-19 to the IRS. This form can be filed any time before the end of the month following the quarter end for which advance payments are needed. If necessary, the form can be filed several times during each quarter. Once the 2020 Q4 Form 941 has been filed, Form 7200 can no longer be filed.
Due to limited cash flows, employers may not be able to timely deposit their federal employment taxes relating to the qualified wages per during the quarter. The IRS will waive underpayment penalties if all the following apply:
- Employer paid qualified wages to employees in the quarter before the required deposit
- The amount of federal employment taxes due, reduced by taxes not deposited in anticipation of paid sick or family leave credits claimed, is less than or equal to the employer’s anticipated retention credit for the qualified wages for the applicable quarter for the required deposit, and
- The employer did not seek a payment advance by filing Form 7200.
Employers are not required to pay qualified wages per the CARES Act. Employers are required to pay sick and medical leave wages per the Families First Coronavirus Response Act (FFCRA), within certain limits.
The CARES Act also allows employers to defer payment of the employer’s share of the Social Security tax that normally is required to be paid from March 27, 2020 through December 31, 2020. The first half of the deferred amount is payable on December 31, 2021 and the second half on December 31, 2022.
During this payroll tax deferral period, the total payroll taxes incurred by employers for Social Security will qualify for deferral. For self-employed individuals, the payment applies to 50% of the 12.4% Social Security tax on self-employment income. For estimated tax purposes for the 2020 tax year, 50% of the Social Security tax on the self-employment income for the deferral period is still subject to the required installment payment rules of Code Sec. 6654.
This payroll tax deferral applies to all employers, with no requirement to show any specific COVID-19 related impact. However, the deferral does not apply to any taxpayer who receives Small Business Act loans that are forgiven under the CARES Act.
If there are any questions or concerns regarding these changes, please contact our office.