CARES ACT: Payroll Tax Deferral and Employee Retention Credit

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The Coronavirus Aid, Relief, and Economic Security Act (“Act”) contains several business relief provisions, including an employer payroll tax deferral (“Deferral”) and a companion provision allowing an employee retention credit (“Credit”).

1. Deferral

  • The Act allows for deferral of the employer portion of Social Security tax imposed by I.R.C. Section 3111(a).
  • Deferral does not apply to employee income tax withholding, the employee or employer portion of the Medicare tax, or the employee portion of the Social Security tax.
  • There are no employer eligibility requirements with respect to Deferral.
  • Deferral applies to the employer portion of Social Security tax for the period from the date of enactment of the Act (March 27, 2020) and through December 31, 2020.
  • The payment of the tax is deferred, with 50 percent of the tax payable on December 31, 2021, and the remaining 50 percent of the tax payable on December 31, 2022.
  • As long as the taxes subject to the Deferral are timely deposited by the December 31, 2021, and December 31, 2022, dates, the taxes will be treated as timely deposited, thereby avoiding the significant failure to deposit penalties.
  • There are several additional special Deferral rules:
  • The Deferral is not applicable if a taxpayer has had indebtedness forgiveness under the Paycheck Protection Program under the Act.
  • If a customer has a service contract with a certified professional employer organization (within the meaning of I.R.C. Section 7705(a)), the customer who directs such an organization to defer the payment of employment taxes has the liability if the taxes are not timely paid by the applicable deferral date.
  • If an employer designates an agent to deposit employment taxes, the employer who directs the agent to defer the payment of employment taxes has the liability if the taxes are not timely paid by the applicable deferral date.
  • While these rules allow a deferral of the tax payment, they do not change the personal liability of responsible persons for the trust fund portion of withheld taxes (employee income tax withholding and employee portions of Social Security and Medicare taxes).
  • The Internal Revenue Service is authorized to issue regulations and guidance regarding the Deferral rules. As of April 6, 2020, the IRS has not yet issued additional regulations and guidance on Deferral.

2. Credit

  • The Act creates an employee retention credit for employers that close due to the coronavirus pandemic.
  • Eligible employers are allowed a refundable Credit against the employer portion of Social Security tax imposed by I.R.C. Section 3111(a) based on amounts of qualified wages paid to employees from March 13 to December 31, 2020.
  • The amount of the Credit for a three-month quarter is generally equal to 50 percent of qualified wages (up to $10,000 in wages per employee for 2020) for each employee.
  • For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts.
  • For employers with 100 or fewer employees, all wages paid qualify for the credit. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.
  • Qualified wages do not include amounts of paid sick leave related to COVID-19 and amounts of paid public health emergency leave that employers with fewer than 500 employees generally are required to provide under the Families First Coronavirus Response Act.
  • Qualified wages include qualified health plan expenses of the employer that are expended to maintain a group health plan and that are excluded from employees’ gross income under I.R.C. Section 106(a).
  • Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak.
  • Employers that have gross receipts that are less than 50 percent of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80 percent of their gross receipts for the same calendar quarter in the prior year.
  • For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts.
  • For employers with 100 or fewer employees, all wages paid qualify for the credit. The credit is provided for wages paid or incurred from March 13, 2020, through December 31, 2020.
  • The Credit is refundable. The refundable amount of the Credit is the amount, if any, by which an employer’s Credit for the quarter exceeds the employer portion of Social Security tax for the quarter.
  • The Credit is reduced by credits available under the Families First Coronavirus Response Act, the credit under I.R.C. Section 3111(e) for employing qualified veterans, and the I.R.C. Section 3111(f) credit for research expenditures for qualified small businesses.
  • Deferral (discussed above) is available to the extent that the Credit does not exceed the amount of tax for the quarter.
  • An employer receives the refundable Credit, regardless of whether it uses a third-party payer.
  • An employer cannot take the Credit against its payroll tax liability if it acquires a Payroll Protection Program loan under the Act, even if the employer does not receive forgiveness of all or a part of such loan.
  • For further information about claiming the credit or about filing for an advance of the refundable portion of the Credit, please see this blog post.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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