While the entire business community spent the past few weeks focused on getting SBA loans, we want to make sure the significant tax credits and deferrals made available by the CARES Act and other regulatory changes are not overlooked. Below, we have compiled a checklist of the provisions and their eligibility requirements that can translate into substantial savings.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon, for legal or tax advice.
EMPLOYEE RETENTION CREDIT
Effective as of March 12th, 2020, the Employee Retention Credit under the CARES Act was created to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in qualified wages per employee who is paid by employers whose business has been financially impacted by COVID-19.
Who is eligible to receive this credit?
Anyone who has received a PPP loan, whether or not it is forgiven, is ineligible for this credit.
All employers, including tax-exempt organizations, that meet one of the following conditions are eligible for the credit:
A. Operations were fully or partially suspended during any calendar quarter in 2020, due to government orders. This includes government-mandated shutdowns, curfews/limits on hours and workforce or a lack of supplies due to vendor closures. This does not include voluntarily closure of a business.
B. A significant decline in gross receipts experienced in a calendar quarter. A significant decline is defined as a 50% decrease of gross revenue from the same quarter in 2019. The duration of a significant decline includes all quarters that follow in 2020, until the quarter after gross revenue surpasses 80% of 2019 revenue.
How do I calculate the credit amount?
The credit is calculated as 50% of qualified wages (including health insurance) paid to eligible employees in a calendar quarter, up to a maximum wage of $10,000 annually. Qualified wages vary based on the size of an organization:
Organizations with less than 100 employees:
Qualified wages are wages paid to any employee during quarters that meet the eligibility conditions above.
Health insurance expenses are included as a qualified wage.
Organizations with more than 100 employees:
Qualified wages are wages paid only to an employee that is not providing services due to partial or full suspension of operations, or reduction of income. This amount cannot exceed that of wages paid 30 days prior to March 12th. This credit can also be used to cover wages for employees working reduced hours where the employer continues to pay their full-time wages. However, the credit is proportionate to the hours of no service.
If an employer pays for health insurance for employees that are not working (whether or not they have received other wages), the entire health insurance premium is eligible. If the employee is working reduced hours, health insurance is prorated in proportion.
The maximum credit is $5,000 per employee per year.
How do I claim this credit?
To claim this credit, reduce your payroll tax deposits by 50% of your qualified wage. If the credit is higher than the tax deposits, an accelerated credit can be requested through Form 7200 without having to wait for your 941 filing.
Please note: This credit does not get calculated as income, but rather as a reduction of wages, and will therefore decrease your wages for 199A calculation.
PAYROLL (SOCIAL SECURITY) TAX DEFERRAL
The CARES Act allows a deferral of the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of the CARES Act’s enactment, through December 31st, 2020.
Who is eligible?
All organizations, including those that received PPP loans, are eligible.
When will the deferred taxes become due?
A payment of 50% of the deferred payroll taxes will be due on December 31st, 2021, and the remaining 50% by December 31st, 2022. If an employer receives forgiveness for a PPP loan, it is no longer eligible for this deferral. However, the deferral is still allowed until the date of forgiveness. At that point, employers will need to make regular payroll tax deposits.
How do I claim this deferral?
The way to apply this credit is as follows: reduce your payroll tax deposit by the employer portion of Social Security tax due. If you do not pay deposits, you can simply reduce the amount you pay when your 941 form is filed.
EMERGENCY PAID SICK & EXPANDED FAMILY MEDICAL LEAVE CREDITS
The Families First Coronavirus Response Act ensures that employees are eligible for two weeks of paid sick leave and use of 12 weeks of Family and Medical Leave Act leave for several circumstances related to COVID-19. Employers can claim a Social Security tax credit to offset the cost of providing expanded FMLA and emergency paid leave to their employees. The refundable credits would apply to all wages paid under these programs, effective from April 1st through December 31st, 2020.
Who is eligible?
Employers with fewer than 500 employees, with employees on leave due to:
- COVID-19 illness
- Quarantine
- Caring for an individual in quarantine
- Caring for a child whose school is closed, or whose childcare provider is no longer available due to COVID-19 illness
Please view this article for provision specifics.
How can I claim this credit?
Employers who pay paid sick and emergency family medical leave in accordance to FFCRA are entitled to a dollar-for-dollar tax credit. The credit is applied by reducing your payroll tax deposits by the amount paid to employees.
Employers can potentially take advantage of all three tax credits and deferrals. If the credit amount is higher than the tax deposits, an accelerated credit through Form 7200 can be requested without having to wait for your 941 filing.
We will continue to keep you updated as more information becomes available.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
