CARES Payroll and Employment Taxes Alert
In our previous tax alert, we summarized the highlights of the business-related tax provisions in the CARES Act. This alert expands on several provisions relating to payroll and employment tax relief that are part of the Act.
Deferral of payment of employer payroll taxes.
- Under the CARES Act, businesses and those who are self-employed will be able to defer paying the employer portion of payroll taxes that are otherwise due from March 27, 2020 through December 31, 2020. Such deferred amounts will be due in two equal installments, 50% at the end of 2021 and 50% at the end of 2022.
- Taxes that are eligible for deferral include the 6.2% employer portion of the Social Security payroll tax (and the employer and the employee representative portion of Railroad Retirement taxes, that are attributable to the employer 6.2% Social Security rate).
- With respect to self-employed taxpayers, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability).
Note: The deferral is not available to employers receiving a Small Business Act loan under the CARES Act.
Employee retention credit for employers.
- Under the CARES Act, certain employers may qualify for a refundable tax credit against the 6.2% employer’s portion of the Social Security payroll tax (or against the Railroad Retirement tax). The credit amount is for 50% of “qualified wages” (as further described below) paid to employees after March 12, 2020 through December 31, 2020.
- The credit is available to employers carrying on business during 2020, including most non-profit organizations (but not government entities). The IRS clarified in a Q&A published on its website yesterday that the credit is available to any employer, regardless of size and regardless of whether the business is conducted in a corporation, a pass-through entity (such as a partnership, S corporation or LLC) or sole proprietorship.
- The credit is available to employers.
- Whose operations have been fully or partially suspended as a result of a government order related to COVID-19 limiting commerce, travel or group meetings, or
- Who have experienced a more than 50% reduction in quarterly receipts in comparison to the same quarter in 2019 during the March 13, 2020, to December 31, 2020 period. The eligibility under this 50% gross receipt reduction ends in the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter.
- As mentioned above, the credit is for “qualified wages.” For employers with more than 100 full-time employees in 2019, the eligible wages are wages of employees who are not providing services because of the business suspension or reduction in gross receipts described above. For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees have not been prevented from providing services. The 2019 employee number is based on the 2019 average number.
- The credit is provided for wages and compensation, including health benefits, and is capped at the first $10,000 of compensation paid by the employer to an employee, which means that the credit is at a maximum of $5,000 per employee.
- Wages do not include (i) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (ii) wages taken into account for the employer income tax credit for paid family and medical leave or (iii) wages in a period in which an employer is allowed for an employee a work opportunity credit. An employer may elect to not have the credit apply on a quarter-by-quarter basis.
- Note: The credit is not available to employers receiving a Small Business Act loan under the CARES Act.
- In connection with the above credit, the IRS issued yesterday a notice of relief from failure to make employment tax deposits due to COVID-19 related credits. Under the IRS notice, an employer will not be subject to a penalty for failing to deposit employment taxes that are subject to the employee retention credit. This essentially means that employers may pay “qualified wages” using employment taxes that otherwise would be required to be deposited, but without incurring a failure to deposit penalty.
- The IRS also clarified that the business does not need to wait until it files its 2020 tax return to claim the credit. The credit may be claimed against the employer portion of employment taxes. To the extent that the credit amount exceeds the employer portion of employment taxes due, the credit would be treated as an overpayment and would be refundable to the employer.
- Additional guidance is expected regarding the actual process for claiming and receiving the credit.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.
Author Sharon Shachar is a partner in the tax practice group at Klehr Harrison.