Changes to 2020 Federal Payroll Taxes

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.

SBA Paycheck Protection Program

The last couple of weeks here at Command Center have been … unprecedented.

We have sent employees home, although we have not let anyone go.

Critical personnel (including me somehow) are still coming in, although we are instituting a policy of one-person-in-the-office-at-a-time.  

I understand working at home, but a typical accounting firm is not geared to work from home indefinitely. For one thing, it takes administrative staff to keep the information and document flow going to the at-homers, and there is no administrative staff.

Fortunately, the IRS and many (if not most) states have acknowledged the reality of the situation and are allowing extensions of time to file and pay. There was probably no choice: preparers were not going to be able to get the work done anyway. It is likely that your return will be extended this year, even if you have never extended before.

Some of our clients have shut down. One, for example, works with product promotion at Kroger’s. Have you been to a Kroger’s recently? The last problem they have is moving merchandise.

Let’s talk about something. There is a brand-new SBA program for emergency funding. It may be that you have never considered government assistance before, but these are extreme times.

We are talking about the “Paycheck Protection Program.” Congress took an existing SBA loan program and sweetened the pot. Its purpose is – flat out – to encourage employers to retain employees and – if the employer has already furloughed employees -to hire them back.

Here are the general features of the program:

(1)  It expires June 30, 2020.

(2)  Think businesses with less 500 employees, but there are exceptions.

(3)  In a bit of a surprise for the SBA, the program includes nonprofits (again, with less than 500 employees)

(4)  The maximum loan amount is 2.5 times average payroll during the one-year period before the date the loan is made.

a.    With adjustments for new businesses, of course.

(5)  That maximum caps out at $10 million.

(6)  The loan is principally to fund payroll (with some limitations), but it will also cover health insurance, rent, utilities and some interest expense.

(7)  Now think math:

A times B

A is the sum of those expenses described in (6) for the 8 weeks after you get the loan.

(8)  Let’s talk B.

B is a fraction. The government wants to know whether your workforce has gone up or down in number.

The numerator is going to be the number of employees between February 15 and June 30, 2020.

The denominator is the number of employees during the same period in 2019.

There are adjustments for real-life situations that do not fit the above periods.

There is also a test which substitutes payroll dollars for the number of employees. You fail the test if your payroll reduction (dollar-wise) exceeds 25%.

(9)  So what, you ask.

Let’s say you have 17 employees for the 2020 period.

Let’s say you had 16 employees for the 2019 period.

Fraction-wise, that is over 100%. Let’s round that down to 100%.

Let’s multiply that 100% by something.

What is the something?

The loan you took out.

Let’s say the loan was $125,000.

Multiply $125,000 by 100%.

You get $125,000.

The government will forgive 100 PERCENT of the loan! The entire $125,000 is gone, forgiven, paid-off, hasta luego, soyonara.

Wow.

(10)      Is there a follow-up to that?

Yep.

Generally, the forgiveness of debt results in income to the person whose debt was forgiven. It is why people get those 1099s in the mail from the credit card companies which have given up on collecting.

For purposes of this loan, the forgiveness will NOT count as income.

So let’s get this straight. You keep your employees on board. The government loans you money for your payroll. The government forgives the money. You walk away scot-free.

What happens if you don’t get to 100%? Then a portion of the loan remains. You pay interest not to exceed 4% and repay that portion of the loan over a period of up to 10 years. Still … not bad.

Folks, if this is you – please check it out before the deadline or the funding runs out.

Family First Coronavirus Response Act

Congress passed and the President signed a coronavirus-related bill this week. While mainly addressing employment benefits, it also includes payroll-tax-related provisions to mitigate the effect of the benefit expansion on employers.

Following is a recap of the Act. It is intended as an introduction and quick reference only. Please review the Act itself for detailed questions.

The Family First Corona Virus Response Act has two key employment-benefit components. Employers are to be reimbursed for the benefit expansion via a tax credit mechanism.

A. The Emergency Paid Sick Leave Act

1.  Private employers employing less than 500 employees shall provide an employee with paid sick time if:

i. The employee is subject to quarantine or isolation due to COVID-19.

ii.  The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID– 19.

iii.  The employee is experiencing symptoms of COVID– 19 and seeking a medical diagnosis.

iv. The employee is caring for an individual described in (i) or has been advised as described in (ii).

v. The employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions.

vi. The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

2. Full-time employees are entitled to 80 hours of paid sick time.

3. Part-time employees are entitled to the average number of hours worked on over a 2-week period.  For employees with varying schedules, the employer shall use the employee’s average number of hours per day over the 6-month period ending on the date the employee takes leave under the Act.

4. If an employee takes time off for self-care, the employee shall be compensated at the employee’s regular pay rate.

     i. Not to exceed $511 per day and $5,110 in the aggregate

5. If an employee takes time off for a sick family member or child, the employee shall be compensated at 2/3 of the employee’s regular pay rate.

     i. Not to exceed $200 per day and $2,000 in the aggregate

6. There are comparable provisions for the self-employed.

7. The Act expires on December 31, 2020.

8. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

9. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

B. Emergency Family and Medical Leave Expansion Act (E-FMLA)

1. The Act expands coverage of the Family and Medical Leave Act (“FMLA”) for employers with fewer than 500 employees. Employees are typically not eligible for FMLA leave until they have worked at least 12 months and 1250 hours. 

i.  For purposes of E-FMLA, this threshold is reduced to 30 days.

2.  E-FMLA applies if the employee leave is to care for a child under 18 if the school or place of care has been closed or child care provider is unavailable due to a public health emergency.

3. Protected leave can be for up to 12 weeks, but the first 10 days may consist of unpaid leave.

4.  The employee shall be compensated not less than two-thirds of the employee’s regular rate of pay.

i. Not to exceed $200 per day and $10,000 in the aggregate (for each employee)  

5. There are comparable provisions for the self-employed.

6. The Act expires on December 31, 2020.

7. The Labor Secretary is authorized to exempt employers with less than 50 employees if the requirements would imperil the viability of the business.

8. Employers who violate this Act shall be considered to have failed to pay minimum wages in violation of the FLSA and be subject to penalties related to such a violation.

C. Tax Credits

1. The compensation paid under the Act is not subject to the Old-Age, Survivors and Disability portion of FICA (that is, the 6.2%).

2. The compensation paid under the Act is subject to the Hospital Insurance portion of FICA (that is, the 1.45%).

3. On a quarterly basis, employers can claim a payroll tax credit for the sum of the following:

                a. Wages paid under this Act

b. Allocable “qualified health plan expenses” 

      ... think health insurance

c. The employer portion of Hospital Insurance (that is, the 1.45%)

4. Treasury is authorized to issue Regulations waiving penalties for not making payroll tax deposits in anticipation of the credit to be allowed.

5. The credit is refundable if it exceeds the amount the employer owes in payroll tax.

6. Employer taxable income is to be increased by the amount of payroll credit received.

           i. Otherwise there would be a double tax benefit.