New Payroll Tax Benefits for Businesses Can Provide Substantial Relief

The federal government’s CARES Act offers immediate relief in the form of payroll tax credits and deferrals that can aid with employee payroll expenses during the COVID-19 pandemic. 

Below are three new payroll tax benefits available to employers. 

Families First Coronavirus Response Act (FFCRA)

Employers that pay employees as part of an “emergency sick pay” plan, where the employees are not working from home in any capacity (via computer or otherwise), qualify for a credit if the employees are:

A. sick as a result of COVID-19; or

B: unable to work due to familial responsibilities, including taking care of an elderly family member or a child home from school as a result of a government closing.

An employer that is paying an employee who was stricken with COVID-19 or believes he has come into contact with an individual who had COVID-19, and therefore has self-quarantined, would be entitled to $511 per day per employee credit against their Federal Insurance Contributions Act (FICA) tax up to 10 days or $5,110, per employee.

An employee taking care of either an elderly parent or a child home from school, as a result of a government shutdown, would be entitled to a $200 per day credit for 10 days, up to $2,000 per employee.

Additionally, as a result of the prolonged school shutdowns around the country, provided the employer continues to pay the employee as described above, the government will provide an additional maximum of $200 per day, or $1000 per week, for up to 10 weeks. This translates to a maximum of $10,000 per employee ($200 x 5 x 10). 

Based on the above, it is therefore possible for an employer to get the benefits of the additional $2,000 per employee plus the $10,000 as a result of the prolonged school shutdowns—maximizing to $12,000 per employee.

Proper documentation is required and should then be disseminated to the respective payroll company to synthesize into the quarterly 941 payroll tax returns so that an employer gets the appropriate credits as soon as possible. The difference between the FICA due, less the credit the employer is entitled to, will either result in less FICA taxes to be paid to the government or a refund to the employer. 

It is important to note that payment of sick pay and/or family leave pay is mandatory for all employers with fewer than 500 employees. Employers with 500 or more employees are exempt. Employers with less than 50 employees may apply for an exemption from the requirement to provide family leave pay in certain circumstances. Also, employers that have received a PPP loan cannot count sick and family leave pay paid under the provisions of the FFCRA toward their Paycheck Protection Program (PPP) loan forgiveness.

Employee Retention Credit

If your business has been fully or partially suspended as a result of a government edict during the calendar quarter, or your business has had a significant decrease in its gross receipts of at least 50 percent compared to the prior year’s quarter, then the government allows up to a maximum of a $5,000 credit for each employee against federal employment taxes. Such credit is calculated at 50 percent of an affected employee’s wages. Therefore, if an employee earns $10,000 or more between March 12 and December 31, the employer would be entitled to a credit of $5,000. This is the maximum the employer can get for 2020. This credit is refundable, so if the total amount of credits exceeds the employer’s quarterly tax liability as reported on Form 941, the excess amount will be refunded to the employer.

For employers with more than 100 employees, the credit is available for any wages paid to an employee who cannot perform services for the employer due to a shutdown order limiting commerce, travel or group meetings. The IRS recently released favorable guidance which provides that credits are available for payments made to employees who are on a reduced work schedule but for whom the employer still pays wages based on a workload which is higher than the employee’s actual workload.

For employers with 100 or fewer employees, the credit applies to all wages paid by the employer. However, employers should review recent Internal Revenue Service (IRS) guidance regarding which employers are affected. 

Employers who received a PPP loan are not eligible for employee retention credits. Also, sick pay and family leave pay paid under the FFCRA may not also be used to generate retention credits.

Payroll Tax Payment Deferral

There is a third and separate tax benefit that can be adopted in addition to the two mentioned above: a deferral of the employer 6.2 percent FICA tax otherwise due between April 1 and December 31, 2020. Fifty percent of the deferred taxes are due at the end of 2021 and 50 percent are due at the end of 2022.

All employers qualify for this deferral, so if you haven’t done so already, you should contact your payroll service provider and ask that they start deferring payment of the employer’s share of FICA tax. 

Speak With Your Tax Advisor

These new tax benefits are designed to help alleviate some of the financial hardship associated with keeping employees on payroll during the COVID-19 pandemic. Your tax advisor can work with you to ensure that you qualify for and receive appropriate tax relief during these challenging times. 

James M. Brower Jr., CPA, MST, and Neil Sonenberg, CPA, are Partners at Marks Paneth LLP, a premier accounting, tax and advisory firm. They can be reached at jbrower@markspaneth.com and nsonenberg@markspaneth.com.