Employee Retention Credit and Payroll Tax Deferral

Jun 25, 2020 | Business

As many businesses have been affected negatively across the nation due to the effects of the Coronavirus, there are a number of payroll tax benefits resulting from the CARES Act that have become available to help employers during this difficult time.

One option for employers, found in Section 2301 of the CARES Act, is the Employee Retention Credit. The purpose of this credit is to encourage employers to keep employees on the payroll, even if they are not working during the applicable period due to the effects of the coronavirus outbreak. This credit is a fully refundable tax credit against certain employment taxes equal to 50 % of the qualified wages an eligible employer pays to its employees after March 12, 2020, and before January 1, 2021.

Who qualifies for the credit?

Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during the calendar year 2020 and experience either of the following:

  • Have to fully or partially suspend operations during any calendar quarter in 2020 due to the coronavirus governmental shut-down order; OR
  • Encounter a significant decline in gross receipts as a result of the coronavirus during any calendar quarter in 2020. This would occur when an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.

How much is the credit?

The refundable employee retention tax credit is equal to 50% of qualified wages (including certain health plan costs) eligible employers pay employees starting March 13, 2020, through December 31, 2020. For each employee, qualified wages up to $10,000 can be included to determine the amount of the 50% credit. The maximum credit per full-time employee for all calendar quarters is $5,000.

What are qualified wages?

  • Qualified wages are the wages employers pay to their employees during the time period indicated above.
  • Qualified wages also depend on how many employees an eligible employer has.
    • For an employer who averaged fewer than 100 full-time employees during 2019, the credit is based on wages, including health care costs, paid to all employees, up to $10,000 per employee.
    • For an employer who averaged more than 100 full-time employees during 2019, the credit is based on wages, including certain health care costs, paid to employees who did not work during the time period because business operations were suspended or due to the decline in gross receipts.

How do I claim the Employee Retention Credit?

Eligible employers should report their total qualified wages for each quarter on their quarterly employment tax returns, which in most cases will be Form 941, Employer’s Quarterly Federal Tax Return. The credit reduces your employer Social Security tax liability. If your credit ends up being more than your Social Security tax liability, the excess will be refundable.

Can I claim this credit in addition to another credit or loan?

  • If an employer receives a loan under the Paycheck Protection Program, then the employer cannot claim the Employee Retention Credit.
  • Employers can claim both the Employee Retention Credit and the Families First Coronavirus Response Act paid leave credit, however, both credits cannot be claimed on the same wages.
  • An employee’s wages are not included in this credit if the employer is granted a Work Opportunity Tax Credit for the employee.

Another option for employers, found in Section 2302 of the CARES Act, is the Payroll Tax Deferral. This option allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes.

There is no dollar cap on the total amount of an employer’s social security taxes that can be deferred. It is important to note that this credit does not cover other payroll taxes such as Medicare tax or employee’s share of the Social Security tax.

Who qualifies for the Payroll Tax Deferral?

Unlike the Employee Retention Credit, the Payroll Tax Deferral is available to all employers regardless of size.

When is this deferral available to employers?

The deferral became available as soon as the CARES Act was signed into law on March 27, 2020 and will end on December 31, 2020.

How does the Payroll Tax Deferral work?

Employers will not be required to make any special election to participate in this deferral program. The Internal Revenue Service will be revising Form 941, Employer’s Quarterly Federal Tax Return, beginning with the second calendar quarter of 2020 to assist in making these deferrals. Employers can defer their share of the Social Security tax (6.2%) on each employee’s covered wages for the rest of the year. Any payroll taxes that are deferred must be paid back in two equal installments as follows: one no later than December 31, 2021, and the other no later than December 31, 2022.

Can I defer the covered payroll tax if I receive a loan under the Paycheck Protection Program?

Yes. On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act of 2020 which means that the taxpayer can now take advantage of the employer payroll tax deferral provision regardless of whether they acquire a PPP loan or if that loan is granted forgiveness.

If you have additional questions or need further information regarding these and other payroll benefits, please do not hesitate to contact one of our team members. Included below are helpful websites explaining in further detail these credits discussed above.

For more information on the Employee Retention Credit please visit: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

For more information on the Payroll Tax Deferral please visit: https://www.irs.gov/newsroom/deferral-of-employment-tax-deposits-and-payments-through-december-31-2020

This article contributed by Amy Cartwright

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