The Coronavirus Aid, Relief, and Economic Security (CARES) Act and its well-known Paycheck Protection Program (PPP) provided substantial relief in the form of tax-free funds and forgivable loans to businesses suffering due to the Covid-19 pandemic. The federal government’s financial support for employers and the self-employed is even more generous than is broadly reported. There are significant cash and tax savings available by deferring certain employment tax payments and taking payroll tax credits for qualifying wages paid to retained workers – all of which are claimed on the second quarter 2020 payroll tax return, due at the end of July.
Deferral of Payroll Taxes
Employers and the self-employed are permitted to defer their share (but not the employee’s share) of social security tax payments for payroll through the end of 2020. All employers are eligible to take advantage of this benefit – simply by properly completing the payroll tax return. The deferral is on wages paid from March 27, 2020 through December 31, 2020.
Employers are responsible for the timely payment of the deferrals as follows. The deferred payments are due:
- On December 31, 2021, 50 percent of the deferred amount; and
- On December 31, 2022, the remaining amount.
This 18-24-month tax reprieve helps businesses retain employees and pay current expenses with funds that would otherwise be due to U.S. Treasury.
Following the passage of the massive 850-page bill, there was confusion about whether businesses would lose their eligibility for the deferral if they also accepted a PPP loan. The IRS clarified the law noting that the receipt of a PPP loan does not limit an employer’s use of the deferral. The Paycheck Protection Program Flexibility Act signed into law in June 2020 codified the employer’s ability to defer the payroll taxes, even if their PPP loan is forgiven.
For the self-employed, half of your Social Security payments (between March 27 – December 31, 2020) of the self-employment tax can be deferred unless you qualified for loan forgiveness under the PPP. In that case, the date of the deferral ends on the date you qualified for forgiveness. That is your deferral end date. December 31st remains the end date if you did not apply for or receive a PPP loan. The deferral amount reduces your quarterly estimated tax obligation and should be calculated based on 50 percent of qualified wages during the time period described above. If deferred payments are processed by the due dates, there will be no interest or penalty charged.
Tax Credits for Retained Workers
The employee retention tax credit incentivizes employers to keep employees on the payroll. This refundable tax credit is available to all employers regardless of size with only two exceptions: state and local government entities and businesses that make small business loans. The credit is worth 50 percent of up to $10,000 in wages paid by an employer. For the first half of 2020, employers should use their second-quarter filing of Form 941, Employer’s Quarterly Federal Tax Return (due July 31st) to apply for the credit.
Qualifying wages are based on the average number of a business’s employees in 2019 and are divided into employers with fewer than 100 employees and employers with more than 100 employees. When employers report their qualified wages on Form 941, they can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. The employee retention credit may be combined with other relief provisions including the aforementioned payroll tax deferral, and employers can also request an advance of the employee retention credit.
Your Daszkal Bolton tax professional can help you calculate the credit (50% of payroll in the prescribed time frame), interpret the meaning of qualified wages of your retained employees, apply for an advance if desired and check that your second quarter payroll tax return is reflecting all of the benefits to which you are entitled.
The federal government’s relief provisions should be carefully considered and utilized where appropriate. Daszkal Bolton’s Covid-19 team will help you to take advantage of these historic aid efforts and keep you in compliance. Each program has its own rules, benefits and obligations that may or may not be advantageous for your situation.