The CARES Act provides two tools for boosting an employer’s cash flow by reducing its employment taxes through a tax credit, and by delaying payment of certain payroll taxes.
Employee Retention Credit
What employers are eligible for the credit against taxes?
The new Employee Retention Credit under section 2301 of the CARES Act applies to employers in a trade or business in 2020, suffering declines in a quarter beginning after January 1, 2020 in which gross receipts are less than 50% of gross receipts for the same quarter in the year before, because of the effects of the Covid-19 emergency. It also applies to employers in a trade or business in 2020 whose operations were fully or partially shut down during a calendar quarter because of the COVID-19 emergency.
When does eligibility end?
The eligibility for the credit ends in the calendar quarter when gross receipts are greater than 80% of gross receipts compared to the same quarter of the year before. If sooner, it ends on December 31, 2020.
Does taking a small business loan disqualify an employer for the credit?
Yes. Employers taking a small business interruption loan are not eligible for this credit.
How is the amount of the credit determined?
The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000. The amount of the credit is 50% of qualifying wages, so the maximum credit on any employee’s wages is $5,000 in the calendar year.
Do wages include health benefits?
Yes. Wages include the employer’s cost of health insurance for the employee.
Can any wages below the applicable limits be disqualified from the credit?
Yes. The amount of qualified wages for which an employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First law.
What taxes are subject to the credit?
The credit is allowed against the employer portion of social security taxes under section 3111(a) of the Internal Revenue Code.
What are Refundable Credits?
The employer may get a refund if the amount of the credit is more than certain federal employment taxes the employer owes. That is, if for any calendar quarter the amount of the credit exceeds the employer’s portion of the social security tax on all wages, then the excess is treated as an overpayment and refunded to the employer.
What are qualifying wages?
Wages subject to the credit depend on the size of the employer.
For an employer with more than 100 full-time employees, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
For an employer with 100 or fewer full-time employees, all wages paid during the period described in (1) or (2) above are eligible for the credit.
For what period may wages be “qualifying wages?”
Qualifying wages refer only to wages between March 13, 2020 and December 31, 2020.
Is an employer required to pay qualifying wages?
No. The CARES Act does not require employers to pay qualifying wages.
Delay of Payroll Taxes
How does the tax deferral work?
Employers and self-employed individuals can defer payment of the employer share of the social security tax payable on income received, from March 27, 2020 through December 31, 2020. Deferred amounts must be repaid over the course of the next two years, with fifty-percent due December 31, 2021 and the balance due December 31, 2022.
What employers cannot delay payment of social security taxes on under this provision of law?
This delay in tax payment does not apply to any employer whose small business loan under the CARES Act has been forgiven.
About the Author: Evelyn Haralampu
Evelyn Haralampu is a partner at Burns & Levinson. She specializes in assisting businesses, executives, and non-profit and governmental organizations in designing employee benefits programs and executive compensation to help clients meet their objectives, while saving and deferring costs through tax efficiencies. Evelyn has served on the ABA’s Subcommittee on Government Submissions, recommending regulatory policies to the IRS, and is a member of the Tax Council of the Massachusetts Bar Association, which influences the development of tax legislation in the Commonwealth. She can be reached at firstname.lastname@example.org or 617.345.3351.