On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. In addition to the tax benefits provided under the Families First Coronavirus Response Act (FFCRA, see more information on the FFCRA here and here), the CARES Act provides employers with new incentives to encourage employee retention, including a payroll tax credit and a deferral of payroll tax deposit requirements.
The employee retention credit is available to all employers who carried on a trade or business in 2020 and either (1) had operations fully or partially suspended due to the COVID-19 crisis; or (2) had gross receipts decline by more than 50% when compared to the same calendar quarter in the prior year. Employers cease being eligible when their gross receipts for a quarter exceed 80% of their gross receipts for the same quarter in the previous year.
The CARES Act provides that this refundable payroll tax credit is equal to 50% of qualified wages paid to employees from March 13, 2020 through December 31, 2020. For employers with 100 or fewer full-time employees, all wages paid to employees qualify. For those employers with over 100 full-time employees, qualified wages are those wages paid to employees when they are not providing services due to COVID-19 circumstances. Qualified wages cannot exceed $10,000 per employee for all calendar quarters in 2020, capping the credit at $5,000 per employee.
To prevent employers from “double dipping” in tax benefits offered under the CARES Act and the FFCRA, some important exceptions exist. Employers must reduce the ordinary deduction taken for wages by the amount of the retention credit. Furthermore, employers may not take certain wages into account when determining the employee retention credit, including any wages: (1) that generate a payroll tax credit under the FFCRA (which provides for emergency paid sick leave and emergency FMLA); (2) taken into account for the normal FMLA credit (available under Section 45S); (3) paid to certain related individuals; or (4) paid to an employee for whom a work opportunity tax credit is claimed as a qualified veteran.
Generally, employers are required to deposit payroll taxes throughout the year. Under the CARES Act, however, employers may defer deposits of some payroll taxes from March 27, 2020 through December 31, 2020. Specifically, employers may defer deposits of their portion of Social Security taxes through the end of the year. Taxes deferred will be considered paid if Employers deposit 50% of the deferral by December 31, 2021, with the other 50% remitted by December 31, 2022. If an employer is entitled to a refund of credits under the CARES Act or the FFCRA, it may retain additional employment taxes to satisfy the credit, such as withheld federal income tax and the employee’s share of Social Security and Medicare tax. If insufficient payroll tax funds are available to satisfy the credit, employers may apply to the IRS for a refund.
Please note that the retention credit and payroll tax deferral are not available to an employer who receives a loan under the Small Business Administration’s Paycheck Protection Program provisions under the CARES Act. To learn more about how the CARES Act could help your business, including tax credits, deferrals, or emergency loans, call McNeelyLaw’s attorneys by visiting mcneelylaw.com or calling our office at 317-825-5110.
This McNeelyLaw LLP publication should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer on any specific legal questions you may have concerning your situation.