Payroll Relief Under the CARES Act Softens the Financial Impact of COVID-19 for Employers
On March 25, 2020, the U.S. Senate voted unanimously (96-0) to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act as an attempt to stabilize the U.S. economy disruptions in the wake of the COVID-19 pandemic. The CARES Act aims to boost the economy with over $2 trillion in tax and non-tax emergency aid provided to individuals and businesses. The U.S. House of Representatives approved the bill on March 27, 2020, which is now pending presidential signature.
The CARES Act is 880 pages long, containing numerous different divisions and titles. Subtitle C – Business Provisions of the CARES Act addresses significant relief provisions pertaining to the employee retention credit and delay of employer payroll taxes. Here are details about this subtitle.
Employee Retention Credit
Section 2301 of the CARES Act provides an employee retention credit for employers that are impacted due to the COVID-19 pandemic. It is pertinent to note that this credit is in addition to the payroll tax credit provided under the Families First Coronavirus Response Act (FFCRA). Pursuant to the FFCRA, eligible employers providing emergency paid and sick leave to their employees affected by COVID-19 are allowed payroll tax credits.
Under the CARES Act, eligible employers, including tax-exempt organizations, are allowed a refundable credit against the employer component of employment tax (Social Security and Railroad Retirement) equal to a maximum of 50 percent of qualified wages paid after March 12, 2020, through and including December 31, 2020, for each employee. The total wages attributed to an employee is capped at $10,000 (including health benefits), resulting in a maximum credit of $5,000 per employee.
Eligible employers include any employer carrying on a trade or business during the 2020 tax-year whose business operations are fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to the COVID-19 pandemic. Tax-exempt organizations are deemed to meet this eligibility condition. Additionally, employers with gross receipts that are less than 50 percent of their gross receipts for the same quarter in the prior year are also eligible to claim the employment tax credit, until their gross receipts exceed 80 percent of their gross receipts for the same calendar quarter in the prior year.
Further, for eligible employers with 100 or fewer full-time employees, all employees’ wages up to $10,000 for each employee are eligible for credit. For employers with more than 100 full-time employees, qualified wages are limited to wages paid to employees who are unable to provide services due to the COVID-19 pandemic.
The employee retention provision provides special rules that prohibit an employer from obtaining both the retention credit under the CARES Act and either a “Work Opportunity Tax Credit” under Internal Revenue Code (IRC) Section 51 or an “Employer Credit for Paid Family and Medical Leave” under IRC Section 45S. Essentially, this precludes an employer from receiving a double benefit.
Delay of Employer Payroll Taxes
Section 2302 of the CARES Act allows employers and self-employed individuals to postpone deposits of their share of federal Social Security tax on employees’ wages paid as of the enactment date through and including December 31, 2020. Employers are generally responsible for paying a 6.2 percent Social Security tax on employees’ wages. The CARES Act allows employers to deposit 50 percent of the deferred taxes on or before December 31, 2021, and the remaining 50 percent by December 31, 2022. Employers utilizing either payroll agent arrangements under IRC Section 3504 or certified professional employer organizations arrangements under IRC Section 3511 will ultimately be liable for the taxes if such taxes were delayed at the request of the employer. Further, if taxpayers received loans under the Small Business Act and such loans were forgiven under section 1106 of the CARES Act, then such taxpayers are not eligible for this relief.
Note that relief from Medicare tax or other applicable employment taxes (for example, federal income tax) does not apply to either of the above CARES Act provisions.