Redpath Insights

CARES Act Employee Retention Credit and Payroll Tax Deferral

by Gloria McDonnell, CPA

UPDATED: April 13, 2020 - 11:30 a.m.

On Friday, April 10, 2020, the IRS issued additional guidance regarding the deferral of payroll tax available under the CARES Act. The most significant clarification relates to the deferral of employment taxes for those taxpayers also receiving a Paycheck Protection Program (PPP) loan. The guidance clarifies that employers can defer deposit and payment of the employerโ€™s share of social security tax without penalties up to the date the employer receives a decision from its lender that its PPP loan is forgiven. After that date the employer is no longer eligible to defer the employerโ€™s share of social security tax. Any amount that was properly deferred would be due evenly on December 31, 2021 and December 31, 2022. Click here for a link to the updated guidance. 

In addition, Form 941, Employers Quarterly Federal Tax Return, will be revised for the second quarter filing (April - June) to account for the deferred portion of employer social security tax.  The IRS will provide instructions for employers who deferred deposits otherwise due on or after March 27, 2020 for the first quarter 2020 Form 941.

UPDATED: April 8, 2020 - 9:12 a.m.

The CARES Act approved by the Senate late Wednesday provides broad relief to many businesses and individualsโ€”and you can see a summary of the Act by clicking here. Two major provisions that will impact businesses and their operational decisions immediately are the employee retention credit and the ability to delay payment of employer payroll taxes.

Employee Retention Credit

UPDATE: On April 3, 2020, The IRS added a note to FORM 941, Employer's Quarterly Federal Tax Return to provide guidance to employers that will claim the employee retention credit. 

The employee retention credit of up to $5,000 per employee is available to help businesses retain their employees during this challenging time.

READ MORE: IRS Employee Retention Credit Under the CARES Act FAQ

The credit is available for wages paid during any quarter in 2020 in which a business suspended or closed operations as the result of a government order relating to COVID-19, and it is also available to businesses who remained open during the pandemic but saw a significant decrease in gross receipts compared to the same quarter in 2019. A significant decrease occurs in any quarter of 2020 where gross receipts were less than 50% of the gross receipts for the same quarter in 2019. The credit continues to be available through the quarter following the first quarter in which the gross receipts are greater than 80% of the gross receipts of the corresponding quarter in 2019.

Eligible businesses will receive a credit against their social security payroll taxes. The credit is equal to 50% of the qualified wages paid to each employee during a qualifying quarter and is refundable if the credit exceeds the employerโ€™s payroll tax liability. Note that qualified wages do include the cost of health care. The employer can allocate the costs of maintaining a group health plan (to the extent such costs are excluded from the employeeโ€™s income) pro rata among employees when determining qualifying wages for the quarter.

Qualified wages are determined based on the average number of 2019 full time employees:

  • For businesses whose average full-time employees in 2019 exceed 100, qualified wages are the wages paid to each employee who is not able to work due to either the business suspension or closure, or a significant reduction in gross receipts.
  • For businesses whose average full-time employees in 2019 was not greater than 100, qualified wages include wages paid to each employee during the business suspension or closure as well as wages paid in a quarter in which the business was operating but there was a significant reduction of gross receipts (see above).

In either case, the maximum qualified wages for the year are $10,000 per employee and wages are limited to those paid from March 13, 2020, through December 31, 2020.  Wages for which the business is claiming the work opportunity credit or an employer credit for paid family and medical leave are not qualified wages for purposes of this credit. In addition, wages used in determining the new payroll tax credit for sick leave or family medical leave as introduced in the Coronavirus Relief Act (which you can read more about by clicking here) are not eligible for this credit.

Furthermore, employers who secure a paycheck protection loan provided for in the CARES Act are not eligible for the employee retention credit. Further guidance will be issued regarding advance payment of the credit and proper reporting on payroll tax returns.

Delay of payment of employer and self-employed payroll tax

The CARES Act also provides immediate relief to employers and self-employed individuals by deferring the payment date for certain payroll taxes; businesses can defer payment of their share of the social security tax (6.2%) that would be due from the date of enactment through December 31, 2020. The deferred tax would be due in equal installments, with 50% due on December 31, 2021, and the other 50% due on December 31, 2022.

Self-employed individuals can defer 50% of their share of social security tax (12.4%) that would be due from the date of enactment to December 31, 2020. Half of this deferred tax is due December 31, 2021, and the other half is due December 31, 2022.

The amount of payroll tax deferred will be the net tax after reductions for the sick leave credit, emergency medical leave credit, or employer retention credit claimed by the employer. Guidance provided on April 10, 2020 clarifies that employers can defer deposit and payment of the employerโ€™s share of social security tax without penalties up to the date the employer receives a decision from its lender that its PPP loan is forgiven. After that date the employer is no longer eligible to defer the employerโ€™s share of social security tax. Any amount that was properly deferred would be due evenly on December 31, 2021 and December 31, 2022.  

Both the Employee Retention Credit and the delayed payment of employer and self-employed payroll taxes are designed to provide liquidity to businesses. If you have any questions about the provisions or how they will impact your business, please do not hesitate to contact us.

COVID-19 CARES Act

Gloria McDonnell, CPA

Gloria McDonnell, CPA

Gloria McDonnell is the tax operations director and serves on the leadership team at Redpath and Company. She specializes in corporate and individual tax planning and compliance, multi-state taxation, international tax, and tax research. Gloria works with closely-held businesses in a variety of industries, and has provided business tax accounting services since 1989, and has been at Redpath and Company since 1996.