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Two pieces of recent legislation provide several tax incentives for employers through the payroll tax system: the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and the Families First Coronavirus Response Act (FFCRA), both signed into law this past month of March. While these tax incentives provide a much-needed source of liquidity for many businesses, they have also created confusion regarding their application, interaction with each other, and interaction with other small business loan programs. In some cases, the utilization of one program precludes the use of others, and there are rules to prevent duplicate benefits from being claimed.

You should consult with your accountant or tax professional for more information and an evaluation of what incentives your business may qualify for and derive the most benefit from.

Payroll tax provisions

  • Employee retention credit: Created by the CARES Act to incentivize employers to continue paying employees adversely impacted by the COVID-19 outbreak. The credit is available to eligible entities and is equal to 50% of up to $10,000 of qualified wages per eligible employee paid after March 12, 2020, through Dec. 31, 2020 (maximum $5,000 per employee). Only those entities which are either carrying on a trade or business during 2020 or are a Section 501(c), and are economically affected by the pandemic are entitled to the credit. The economic effect can be proven by either: (1) to total or partial suspension of the entity’s operations as a result of a government order that imposes limitations upon travel, commerce, or group meetings due to the COVID-19 pandemic*; or (2) if there is a greater than 50% reduction in gross receipts for a calendar quarter when compared to the same quarter in the previous year. There is no requirement to show that the reduction is caused by COVID-19 or a government order. If an employer is eligible under the substantial reduction in gross receipts test, it remains eligible through the quarter in which gross receipts exceed 80% of the gross receipts from the same calendar quarter in the prior year (but only through Dec. 31, 2020). IMPORTANT: The CARES Act also created a new Payroll Protection Program (PPP) to provide loans primarily to businesses with less than 500 employees. Employers that receive this new type of loan are not eligible for the employee retention credit unless the loan is fully repaid by May 14, 2020.

  • Employer payroll tax deferrals: Deferral of an unlimited amount of the employer’s employment taxes (6.2% FICA) for any payroll paid from March 27, 2020 through Dec. 31, 2020. This credit may also be calculated prior to calculating any of the other payroll tax credits. This rule permits eligible employers to pay 50% of the deferred amount on Dec. 31, 2021, and the remaining 50% on Dec. 31, 2022.

  • Payroll credit for required paid family leave: Provides a tax credit equal to 100% of any wages and healthcare expenses that an employer is required to pay under the FFCRA,which is a maximum of $200 per day. The only employees eligible for paid family leave under FFCRA are those who are unable to perform services (including telework) because of a need to care for a child whose school or place of care is closed or whose childcare provider is unavailable due to COVID-19. Any healthcare expenses are creditable in addition to the $200 per day, and the credit is increased by Medicare taxes owed on qualified wages. The maximum tax credit per employee is $10,000.

  • Payroll credit for required paid sick leave: The tax credit is allowed in an amount equal to 100% of the qualified sick leave wages paid by an employer under FFRCRA during 2020. Wages are only required to be paid with respect to a maximum of 10 days (or 80 hours) per qualified employee for all of 2020. An employer who voluntarily pays sick leave prior to April 1, 2020, or pays an amount in excess of the required amount is not eligible for credits on those amounts.  In addition to the credit, employers are not subject to payroll taxes on qualified wages.The 6.2% Social Security tax is entirely abated while the 1.45% Medicare tax is still assessed but an equivalent amount is added to the tax credit. Employers are not required by FFCRA to pay more than $511 per day to qualified employees which are those that: (1) are subject to a federal, state, or local quarantine isolation order related to COVID-19; (2) have been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19; or (3) are experiencing symptoms of COVID-19 and are seeking a medical diagnosis.

Refer to the Department of Labor FAQ for details regarding the paid sick leave and the family leave requirements under FFRCRA.

*The full or partial suspension must be related to a mandatory order, proclamation, or decree from the federal government or any state or local government with jurisdiction over the employer’s operations. A business with locations in multiple jurisdictions that is shut down under a government order in one jurisdiction but allowed to fully operate in another jurisdiction is still considered partially shut down due to a government order. A business deemed essential under the applicable government order is not partially shut down, but such business may qualify under this standard if its suppliers are not deemed essential and are unable to supply critical goods or services.

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