[co-authors: Emily Schifter, Constance Brewster, Lynda Crouse]*
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides additional payroll-related relief to employers struggling to meet payroll obligations amid the COVID-19 crisis. These relief provisions are separate from the payroll tax credit offered under the Families First Coronavirus Response Act.
EMPLOYEE RETENTION CREDIT
What is the CARES Act employee retention credit?
This is a new refundable credit related to wages paid from March 13, 2020 through December 31, 2020 by an employer that continues to pay employees during a COVID-19 related shutdown or slowdown. In effect, the government will pay the employer to continue to pay employees.
How much is the credit?
A maximum of 50 percent of qualified wages per employee, up to $10,000 per employee.
How is the credit realized?
It is claimed as a refund/credit of the employer’s 6.2 percent share of Social Security payroll taxes. For example, if an employer is entitled to an employee retention credit of $10,000 and was otherwise required to deposit $8,000 in Social Security payroll taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to.
Can the credit be refunded?
Yes, if it exceeds the employer’s Social Security liability for the quarter.
For example, in the example above, the employer can file a request for an advance payment for the remaining $2,000 using Form 7200.
Can the credit be claimed if the employer receives a Small Business Administration (SBA) loan under the Paycheck Protection Program established by the CARES Act?
No, an employer cannot claim the employee retention credit if the employer also receives an SBA loan under the new Paycheck Protection Program, even if the employer does not ultimately have that loan forgiven.
What employers are eligible for the credit?
Any for-profit or tax-exempt business operating in 2020 whose:
operations were fully or partially suspended during any calendar quarter during 2020 due to a federal, state or local COVID-19 shutdown order, or
business remained open, but, during any quarter in 2020, had gross receipts for that quarter that were less than 50 percent of what they were for the same quarter in 2019. The employer will be entitled to a credit for each quarter until the business has a quarter where it has recovered sufficiently that its receipts exceed 80 percent of what they were for the same quarter in the previous year.
Is a tax-exempt organization eligible for the credit?
Yes, and its entire operations must be taken into account when determining the decline in revenues. Further guidance is needed about what is meant by an exempt organization’s entire operations.
What wages are taken into account for the credit?
If the employer had more than 100 employees, qualified wages are limited to wages that were paid during the quarter for the period of time the business was shut down, limited to $10,000 per employee (for all quarters combined).
If the employer had no more than 100 employees, qualified wages are wages paid to employees during a shutdown, and wages paid for each quarter that the business suffered a decline in receipts as described above in bullet #2 (employers eligible for the credit).
Do health plan expenses count in qualified wages?
Yes, qualified wages include health plan expenses paid or incurred by the employer for health coverage, which are excludable from employees’ gross income under Internal Revenue Code section 106(a). Future Treasury guidance is expected to prescribe how these health plan expenses are to be allocated to qualified wages on the basis of being pro rata among employees and pro rata on the basis of periods of coverage relative to the periods to which the wages relate.
Are there any wages that cannot be taken into account for the credit?
Yes, the following:
wages taken into account for purposes of Emergency Paid Sick Leave or Emergency Family and Medical Leave under the Families First Coronavirus Response Act
wages taken into account under the existing income tax credit for paid family and medical leave
wages of an employee for whom a work opportunity tax credit is claimed.
How does an employer claim the credit?
Employers that are eligible to claim a CARES Act employee retention credit would reduce the amount of taxes deposited with the IRS by the amount of the credit. If the credit exceeds the amount of taxes required to be deposited with the IRS, the employer can request an advance payment of the balance using IRS Form 7200.
PAYROLL TAX DEFERRAL
What taxes can be deferred?
Employers can defer their share of the 6.2 percent Social Security tax that would otherwise be due from the date of the enactment of the CARES Act (March 27, 2020) through December 31, 2020.
When must they be paid?
50 percent must be paid on December 31, 2021, and 50 percent must be paid on December 31, 2022.
What employers are eligible for the deferral?
Any employer that has to pay an employer’s share of the 6.2 percent Social Security tax.
Is the deferral available if the employer receives a Small Business Administration (SBA) loan under the Paycheck Protection Program established by the CARES Act if the loan is later forgiven in full or in part?
No, an employer cannot defer payment of these 2020 payroll taxes if the employer also receives an SBA loan under the new Paycheck Protection Program that is later forgiven in full or in part. However, if an employer merely receives such a loan and ultimately repays the loan in full without having any amount of the loan forgiven, then the employer can also take advantage of this payroll tax deferral.
Is there a dollar cap on the wages that are counted for purposes of the payroll tax deferral?
No, other than the normal Social Security wage base, which places a dollar cap on the amount of wages subject to Social Security tax each year ($137,700 for 2020).
Does the deferral apply to federal income tax withholding, the Medicare tax, or the employees’ portion of Social Security tax?
* Troutman Sanders