Payroll Tax Provisions in the CARES Act
March 31, 2020
Updated 4/20/2020 at 1:15pm ET
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act, signed into law on March 27th, includes significant provisions to encourage employers to retain and continue paying their employees. This blog focuses on the payroll tax deferral and payroll tax provisions of the CARES Act. The CARES Act provides new payroll tax credits and deferrals and favorably modifies some of the payroll tax provisions of the Family First Act passed into law on March 18th.
SC&H’s Key Takeaways
- The CARES Act payroll tax provisions provide credits and incentives for employers to retain and pay employees.
- These provisions attempt to provide employers with additional liquidity during the COVID-19 pandemic.
- Some of the provisions cannot be utilized once receive Paycheck Protection Program loan proceeds and/or forgiveness thereof.
Payroll Tax Deferral
The CARES Act allows employers to defer the payment of payroll taxes incurred between March 27, 2020 and December 31, 2020. The deferral applies to the employer portion of social security taxes (6.2% of employer wages up to $137,700) and the employer’s and employee’s share of Tier 1 Railroad Retirement Tax Act tax up to the 6.2% of wages that corresponds with the social security tax. Self-employed individuals may also defer 6.2% of self-employment taxes incurred during this period.
The deferred taxes are due and considered timely paid if 50% of the amount deferred is paid by December 31, 2021 and the remaining 50% deferred amount is paid by December 31, 2022.
Federal withholding taxes, Medicare taxes and withholding, and employee social security withholding are not eligible for the deferral.
All employers are eligible for the deferral other than those who have loans forgiven under the CARES Act for certain loans provided by the Small Business Administration. Employers who have debt forgiven under the Payroll Protection Program are not eligible for payroll tax deferral on a prospective basis. Prior deferrals may remain in place and be paid according to the relief provisions noted above without interest or penalty.
Employee Retention Credit for Employers Subject to COVID-19
Eligible employers are allowed a credit against payroll taxes for 50% of the qualified wages of an eligible employee for wages paid from March 13, 2020 to December 31, 2020. The credit is refundable if it exceeds the employer’s social security or Railroad Retirement Tax due in a quarter.
To be considered an eligible employer, employers must meet one of two criteria: (1) The employer’s operations must be fully or partially suspended during the calendar quarter as a result of orders from an appropriate government authority due to COVID 19; or (2) The employer’s gross receipts for the quarter are 50% less than the gross receipts for the same quarter in the prior year. Businesses such as gyms which have been completely shut down due to a government order, are clearly eligible employers under criteria (1). It is currently unclear whether criteria (1) applies to businesses whose employees have been able to work remotely as a result of a COVID-19 government authority order. Until further guidance is issued, these businesses should look to see if they are an eligible employer under criteria (2). Employers qualifying under criteria (2) will continue to qualify through December 31, 2020 until the first calendar quarter beginning after a calendar quarter for which gross receipts of such employer are greater than 80% of gross receipts for the same calendar quarter in the prior year.
Tax exempt organizations under Internal Revenue Code §501(c)(3) may be considered a qualified employer if they meet either of the criteria described above.
Wages for an eligible employee cannot exceed $10,000 reduced by:
- Wages considered under sections 7001 and 7003 of the Families First Act which provides payroll tax credits for paid sick and family leave for COVID-19 for businesses with less than 500 employees;
- Wages considered under Internal Revenue Code 45S which provides credits for paid family and medical leave;
- Wages considered for an employee for which the work opportunity tax credit is claimed; and
- Wages paid to related individuals under Internal Revenue Code 51(i)(1).
An eligible employee for employers with 100 or less full-time employees during 2019, includes any employee paid wages during the applicable quarter. Qualified wages include wages and employer health plan costs up to the $10,000 limit per employee. Each employee’s wages included are limited to the wages that were paid to the employee during an equivalent period during the 30 days immediately preceding the current period.
For employers with more than 100 employees in 2019, the wages qualifying for the credit only include wages for employees not providing service due to the criteria (1) COVID-19 closure or criteria (2) gross revenue reduction described above. A controlled group of corporations is considered a single employer for this purpose.
Qualifying wages paid between March 13, 2020 and March 31, 2020 should be reported on the employer’s second quarter 2020 Form 941 along with the qualifying wages paid in the second quarter (April, May and June) of 2020.
Similar to the payroll tax deferral provisions, employers utilizing Small Business Administration loans under the CARES Act are ineligible for these retention credits.
Changes for the Family First Act Payroll Tax Credits
The Family First Act provides payroll tax credits and requires paid leave for employees impacted by COVID-19. Specifically, paid leave is required to be paid by employers with fewer than 500 employees if the employee is unable to work or telework because the employee:
- Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine related to COVID-19:
- Is experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- Is caring for an individual subject to an order described in 1) or self-quarantine as described in 2);
- Is caring for his or her child whose school or place of care is closed (or child-care provider is unavailable) due to COVID-19 reasons; or
- Is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services.
These credits apply to qualified wages paid during the period April 1, 2020 to December 31, 2020.
The CARES Act includes these modifications:
- Employees laid off on or before March 1, 2020 and who are later rehired, are eligible employees if they worked for the employer at least 30 of the 60 calendar days prior to the layoff.
- Employers with fewer than 500 employees mandated to provide the paid leave are not required to pay more than the specified limits:
- $511 per day and $5,110 in total for 1), 2) and 3) above,
- $2oo per day and $2,000 in total for 4) and 6) above, and
- $200 per day and $10,000 in total for 5) above.
The CARES Act further provides that these credits may be advanced to employers. Penalties will not apply if an employer failed to make a payroll tax deposit in anticipation of payroll tax credits under this provision.
The refundable credits are equal to the required sick wages, the employer’s share of Medicare taxes on these wages and the allocable cost of the employees’ health insurance during the sick period. The employer is not subject to the employer’s portion of the social security tax on these wages.
Eligible employers report the credits on their federal employment tax returns. To claim the credit sooner, an employer can reduce its federal employment tax deposits. An employer can also request an advance payment of the credit by submitting a Form 7200, Advance Payment of Employer Credits Due to Covid-19. These forms should be submitted to the IRS by Fax 855-248-0552.
SC&H Group’s Tax team continues to keep a close watch on updates as they take place. If you have any questions on how these changes apply to your organization, please reach out to our team today.