The Covid-19 pandemic has impacted businesses across most industries. The federal government has passed several stimulus packages to support U.S. employers through the economic disruptions, including several tax-related relief programs to help employers with the economic impact of the pandemic.
Families First Coronavirus Response Act Tax Credits
On March 18, the president signed the Families First Coronavirus Response Act (FFCRA) into law, requiring businesses with fewer than 500 employees to provide emergency paid sick leave (EPSL) and emergency family and medical leave (EFMLA).
Payments for EPSL are capped at $511 per day and $5,110 in the aggregate per employee. Payments for the EFMLA cannot exceed $200 per day, and $10,000 per employee for all quarters.
To support businesses obligated to provide EPSL and EFMLA, eligible employers are allowed fully refundable tax credits equal to 100% of the FFCRA-mandated leave wages. These credits apply against the employer’s share of Social Security taxes. Employers can immediately claim these tax credits by retaining federal employment taxes that are otherwise required to be deposited with the IRS, including federal income taxes and the employee and employer share of Social Security and Medicare taxes.
If an employer does not have enough federal employment tax deposits to recover the fully refundable credit, the employer can file Form 7200, Advance Payment of Employer Credits Due to Covid-19, and request an advance payment from the IRS. Employers are required to reconcile the credits on their Forms 941, Employer’s Quarterly Federal Tax Return.
CARES Act Tax Credits
On March 27, the president signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which aimed to boost the economy by providing over $2 trillion in tax and non-tax emergency aid to individuals and businesses.
The CARES Act provides an employee retention credit for employers whose business operations are fully or partially suspended due to orders from a governmental authority that limit commerce, travel, or group meetings due to the Covid-19 pandemic.
Specifically, eligible employers under the CARES Act are allowed refundable tax credits against the employer component of employment tax (Social Security and Railroad Retirement) equal to a maximum of 50% of qualified wages paid after March 12, through and including Dec. 31, for each employee.
For eligible employers with 100 or fewer full-time employees, all employees’ wages up to $10,000 for each employee are eligible for credit. For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are unable to provide services due to the Covid-19 pandemic. The maximum credit under this Act is capped at $5,000 per employee.
We note that employers are not permitted to claim employee retention credits on qualified wages paid to employees under the FFCRA. Also, special rules prohibit an employer from obtaining both the retention credit under the CARES Act and either a “Work Opportunity Tax Credit” under Internal Revenue Code (IRC) Section 51, or an “Employer Credit for Paid Family and Medical Leave” under IRC Section 45S. The process for claiming tax credits under the CARES Act is like the FFCRA, as explained above.
Deferral of Employee Social Security Taxes Under the CARES Act
To enhance cash flow for businesses and self-employed individuals, the CARES Act allows them to postpone deposits of their share of Social Security taxes due on or after March 27 through Dec. 31.
Note, businesses and self-employed individuals are ultimately responsible to pay their share of Social Security taxes, with 50% due on or before Dec. 31, 2021, and the remaining 50% due on or before Dec. 31, 2022.
The Paycheck Protection Program (PPP)
The CARES Act also created the PPP, which has enabled many small businesses to obtain forgivable loans. The loan may be forgiven to the extent the proceeds are used to pay bona fide costs during the covered period beginning on the date of the loan disbursement, and the employer maintains full-time equivalent employee headcount and wages.
Bona fide costs include payroll costs, mortgage interest, rent, and utilities. With respect to the interaction of the tax credits available under the FFCRA and/or the CARES Act, and the PPP loan, an employer cannot claim tax credits under the FFCRA and/or the CARES Act, and then claim such amounts as payroll expenses for the purposes of PPP loan forgiveness.
The Executive Memorandum on Payroll Tax Deferral
The executive memorandum permits employers to allow eligible employees to defer the employee component of Social Security taxes on wages paid during the period of Sept. 1 through Dec. 31.
Eligible employees are those whose biweekly compensation is less than $4,000, calculated on a pre-tax basis during each payroll period. Eligible employees are not permitted to defer the employee portion of Medicare tax or federal income tax. All amounts deferred must be repaid by April 30, 2021.
Evaluate Programs Carefully
While these programs aim to provide financial relief to employers, they are extremely complex and, thus, employers should thoroughly assess their circumstances to understand which relief opportunity (or opportunities) best address their business needs.
Employers who have not claimed any tax credits under the FFCRA and/or the CARES Act may retroactively claim applicable tax credits on qualified wages. Employers already receiving tax credits under the FFCRA and/or the CARES Act should meticulously reconcile such credits while filing their quarterly employment tax returns. Employers should also retain the worksheets used for tax credits calculations.
Employers who received the PPP loan should thoroughly document and retain relevant information to substantiate that the amount received is subject to loan forgiveness.
Employers may also consider other tax favorable means to help employees, for example, payments made under a qualified disaster relief arrangement.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Mahoney is a shareholder in the Morristown, N.J., office of Ogletree Deakins and a member of the Employee Benefits and Executive Compensation Practice group and the chair of the Payroll Tax and Fringe Benefits subgroup. He focuses on employment tax matters at both the federal and state levels and strategic tax issues for a global workforce.
Shivam Bimal is an associate in the New York office of Ogletree Deakins and a member of the Employee Benefits and Executive Compensation Practice group and the Payroll Tax and Fringe Benefits subgroup. He assists clients with employee benefits and executive compensation matters.