There were two bills passed in March
that significantly impacted payroll taxes for 2020. The first – Families First
Coronavirus Response Act – expanded employee paid leave, with the intent that
the cost of the leave be shifted to the government via refundable payroll tax
credits. The second – The Coronavirus Aid, Relief and Economic Security Act -
allows employers to defer the deposit of (some) payroll taxes, while also
providing a payroll tax credit to encourage employers directly affected by the
virus (either through government order or decline in business) to retain
employees.
Following is a recap to
aid as you work through this new minefield. As always, remember that no recap
is exhaustive. Please be advised to review the underlying guidance for specific issues
and questions.
The President signed the
CARES Act on March 27, 2020.
The CARES act brought us the
Employee Retention Credit (ERC).
(1) Eligible employers
include tax-exempt organizations but not government agencies.
(2) Eligible employers have a
refundable credit equal to 50% of qualified wages (including allocable health care
expenses) paid employees if the employer …
(a) Fully or partially
suspends operations during 2020 due to orders from an appropriate governmental
authority due to COVID-19; or
(b) Experiences a significant
decline in gross receipts during a calendar quarter.
a.
The period begins with the
first quarter in which gross 2020 receipts are less than 50% of gross receipts
for the same quarter in 2019.
b.
The period ends the quarter
after the quarter whose gross receipts exceed 80% for the same quarter in 2019.
(3) Qualified wages mean
wages paid after March 12, 2020 and before January 1, 2021.
NOTE: This
means that an eligible employer may claim the credit for qualified wages paid
as early as March 13, 2020.
(4) Qualified
wages include allocable health care expenses and are limited to $10,000 per
employee for 2020.
(5) Qualified
wages vary significantly depending on the size of the employer.
(a)
If the employer had 100 or fewer full-time
equivalents (FTEs) in 2019, then qualified wages include wages paid all
employees.
(b)
If the employer had more than 100 FTEs in
2019, then qualified wages mean wages paid an employee not working because of
(a) government orders or (b) a significant decline in gross receipts.
(6) The
credit is 50% of qualified wages, meaning the maximum credit is $5,000 ($10,000
times 50%).
(7) Technically,
the credit is allowed only against the employer share of social security tax
(that is 6.2%), but this is misleading. The credit is fully refundable, so it
will continue offsetting employee payroll withholdings and employer payroll taxes
until the credit exhausted. If there is still a credit remaining, then the remaining
credit is refundable to the employer.
EXAMPLE: CTG
Command Center pays $10,000 in qualifying wages in quarter 2, 2020. Employee
federal income tax, social security and Medicare withholdings are $4,000. The
employer social security is $620 ($10,000 times 6.2%), for a required total
payroll tax deposit of $4,620. The retention credit is $5,000. The retention
credit will offset all the required payroll tax deposits – employee and
employer – and result in a $380 refund to CTG Command Center.
(8) The IRS
realized that having an employer make payroll tax deposits, only to have those
deposits later refunded, is not prudent cash flow management. The IRS will
therefore allow an employer to offset otherwise required payroll tax deposits
by anticipated payroll tax credits. The amounts otherwise due or credited are
to be accounted for with the filing of the quarterly Form 941. If payroll tax
credits are expected to exceed payroll tax deposits otherwise required, there
is also a procedure to obtain an advance refund (that is, before filing Form
941) from the IRS.
(9) There
is an unusual interaction with the CARES deferral of employer payroll taxes:
· An employer can defer and still receive the employee retention
credit, resulting in, in effect, an interest-free loan from the government.
(10) There
is no equivalent of the retention credit for self-employeds.
(11) This
credit does not play well with the emergency sick or expanded family leave
provisions. In short, one cannot use the same wages for more than one credit.
(12) This
credit is not available if the employer receives a Paycheck Protection loan.
The CARES Act also brought us the deferral of employer social
security taxes.
(1) An
employer’s payroll tax liability has two parts: social security tax at 6.2% and
Medicare tax at 1.45%. The deferral is solely for the employer share of social
security taxes (that is, 6.2%).
(2) Unlike
the ERC, the deferral applies to deposits (rather than wages paid) otherwise
required beginning March 27, 2020 and through December 31, 2020.
COMMENT: Therefore, payroll taxes accrued before March
27, 2020 would qualify as long as the payroll tax deposit was due on or after
March 27, 2020.
(3) All
employers are eligible. Unlike the ERC, there is no employer size limitations.
(4) Unlike
the ERC, there is no requirement that the employer be affected by COVID-19.
(5) The
deferral is as follows:
(a) 50% of taxes deferred are
due December 31, 2021
(b) The remaining 50% is due
December 31, 2022
(6) The
deferral also applies to self-employeds. The amount deferred is 6.2% of the
total 15.3% self-employment tax rate. The is no deferral once the self-employed
exceeds the maximum social security wage base.
(7) There
is an unusual interaction with the Families First emergency sick and expanded
family leave credits.
· An employer can defer and still receive the emergency sick and expanded
family leave credits, resulting in, in effect, an interest-free loan from the
government.
(8) There
is an unusual interaction with the employee retention credit (ERC).
· An employer can defer and still receive the employee retention
credit, resulting in, in effect, an interest-free loan from the government.
(9) There
is an unusual interaction with a Paycheck Protection loan.
· No further deferrals are allowed after an employer receives notice
of Paycheck Protection Loan forgiveness.
· However, deferrals up to that date remain eligible for deferral
and are due December 31, 2021 and 2022.
(10) Note
that the deferral affects payroll taxes due on or after March 27, 2020, meaning
that one would expect the deferral to be accounted for on the first quarter employer
Form 941.
The IRS has
clarified that the credit for this stub period will NOT be accounted for on the
first quarter Form 941. Rather they will be added to any credits arising during
the quarter two and reported on the second quarter Form 941.
The President signed the
Families First Coronavirus Response Act on March 18, 2020, introducing two new
(and temporary) paid-leave benefits.
Emergency Sick Leave
(1) Applies to businesses and
tax-exempt organizations with fewer than 500 employees
(2) Applies immediately to
employees of the above employers
(3) The tax credit is based
on qualifying leave provided employees between April 1, 2020 and December 31,
2020.
· Note that emergency sick leave wages paid in 2021 will qualify
if paid for leave taken between April 1 and December 31,2020.
(4) Full-time employees can receive up to 80 hours of sick
leave. Part-time employees can receive leave based on the average number
of hours worked over a two-week period of time.
(5) If …
a.
The employee is subject to a
federal, state or local quarantine or isolation order related to COVID-19;
b.
The employee has been
directed by a healthcare provider to self-quarantine due to concerns related to
COVID-19;
c.
The employee is seeking to
obtain medical diagnosis when experiencing symptoms of COVID-19
… then the
maximum (creditable) paid leave is the employee’s regular rate of pay, up to
$511 per day and limited to $5,110 per employee.
(6) If the employee takes
time-off …
a.
To care for a family member
who is subject to a federal, state or local quarantine or isolation order
related to COVID-19;
b.
To care for a child (under
18 years of age) whose school has been closed or paid childcare provider is
unavailable due to COVID-19; or
c.
Because the employee is
experiencing any other substantially similar conditions as specified by the
Secretary of Health and Human Services
… then the maximum
(creditable) paid leave is 2/3 of the employee’s regular rate of pay, up to
$200 per day and limited to $2,000 per employee.
(7) For both (5) and (6), the
employer is allowed to increase the credit amount by the allocable cost of the
employee’s health insurance coverage.
(8) Employers are still required to withhold employee federal income
taxes and the employee’s share of Social Security and Medicare taxes.
·
The intent is that this will
be covered by the $511/$200 per day allowance.
(9)
Wages paid under the emergency sick leave
provision ….
a.
Are NOT be subject to
employer social security (6.2%), and
b.
ARE subject to employer
Medicare (1.45%)
i. However, this employer Medicare requirement is misleading
because the credit will be increased by the amount of
1.
The employer Medicare tax,
and
2.
The allocable cost of health
insurance coverage
EXAMPLE:
CTG Command Center pays one employee $200 per day for 10 days. It also pays
$100 in health care costs. Employee withholdings are $300 for federal income
tax, $124 for social security and $29 for Medicare – a total of $453.Net pay is
therefore $1,547 ($2,000 – $453) and total compensation (including health care
and employer Medicare) is $2,129. CTG Command Center will receive credit on its
payroll tax return for $2,000 + $100 (allocable health care) + $29 (employer
Medicare) = $2,129. This means that the cost of the employee (excluding
unemployment insurance and workers compensation) has been shifted from CTG
Command to the federal government for the covered period.
(10)
The credit can be offset against all employee withholdings
and employer payroll taxes.
·
Any excess is refundable to
the employer.
(11)
Any credits utilized will
constitute taxable income to the employer.
·
Offsetting the employer
payroll tax expense on wages paid emergency leave employees.
(12)
There is a comparable
provision for self-employeds
a.
However, the “average daily
self-employment income” will not be calculable until year-end, as it refers to 2020
net earnings from self-employment divided by 260 days.
EXAMPLE. Rocket Man is self-employed. He earned $185,000 for
2020, and he spent 10 days taking care of his mom during the crisis. His daily
self-employment income is $712 ($185,000 divided by 260). That however exceeds
$200, so his allowable paid sick leave is $2,000. His 2020 net earnings from
self-employment are reduced by $2,000. He is also allowed to reduce his otherwise-required
quarterly estimated tax payments accordingly.
(13)
There is an unusual
interaction with the emergency sick leave credit and the employer payroll tax
deferral.
· An employer can defer and still receive the emergency sick leave
credit, resulting, in effect, an interest-free loan from the government.
(14) This credit does not play well with the employee retention
credit. In short, one cannot use the same wages for more than one credit.
Expanded Family Leave
(1) Applies to businesses and
tax-exempt organizations with fewer than 500 employees
(2) This is a narrow expansion
of FMLA to include
… employees
unable to perform services (including telework) because of need to care for a
child whose school or place of care is closed or whose childcare provider is
unavailable due to COVID-19.
(3) The employee must have
worked for the employer for at least 30 day to qualify.
(4) The credit is based on
qualifying leave provided employees between April 1, 2020 and December 31, 2020
· Note that emergency sick leave wages paid in 2021 will qualify
if paid for leave taken between April 1 and December 31,2020.
(5) The provision allows up
to 12 weeks of employer-provided protected leave, 10 of which is creditable to
the employer.
(6) The maximum (creditable) emergency family leave is the employee’s
regular rate of pay, up to $200 per day and limited to $10,000 per employee.
(7) The employer is allowed to increase the credit amount by the
allocable cost of the employee’s health insurance coverage.
(8) Employers are still
required to withhold employee federal income taxes and the employee’s share of
Social Security and Medicare taxes.
· The intention is that this will be covered by the $200 per day
allowance.
(9) Wages paid under the expanded
family leave provision ….
a.
Are NOT be subject to
employer social security (6.2%), and
b.
ARE subject to employer
Medicare (1.45%)
i. However, this employer Medicare requirement is misleading
because the credit will be increased by the amount of
1.
The employer Medicare tax,
and
2.
The allocable cost of health
insurance coverage
(10)
The credit can be offset
against all employee withholdings and employer payroll taxes.
· Any excess is refundable to the employer.
(11)
Any credits utilized will
constitute taxable income to the employer.
· Offsetting the employer payroll tax expense on wages paid
emergency leave employees.
(12)
The example given above for emergency
sick leave also covers expanded family leave.
(13)
The discussion about
self-employeds given above also covers expanded family leave.
(14)
There is an unusual interaction
with the expanded family leave credit and the employer payroll tax deferral.
· An employer can defer and still receive the expanded family
leave credit, resulting in, in effect, an interest-free loan from the
government.
(15)
This credit does not play
well with the employee retention credit. In short, one cannot use the same
wages for more than one credit.
(16)
The FMLA “restoration to
position” provision under FMLA does not apply to employers with fewer than 25
employees and meeting certain other requirements.
