In the last year, Congress passed new federal legislation authorizing three key payroll tax breaks for employers. In case you missed it, we have summarized most of those on this JMF blog, and then posted it to our COVID19 page. The following is a brief overview.
- Employee Retention Credit: Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, an employer is entitled to claim an Employee Retention Credit (ERC) for 50% of the qualified wages paid to employees after March 12, 2020, and before January 1, 2021.
To qualify for the ERC in 2020, an employer has to meet one of two requirements during any calendar quarter:
- It fully or partially suspended operations because government authorities limited commerce, travel or group meetings due to pandemic concerns.
- It experienced a significant decline in gross receipts. For this purpose, a “significant decline” occurred when gross receipts were less than 50% of gross receipts in the same calendar quarter of 2019.
Only the first $10,000 of wages paid to an employee during the designated time qualifies for the credit. Therefore, employers can claim a maximum credit of $5,000 per employee.
The ERC offsets the employer’s Social Security and Medicare tax components of payroll tax. An employer could benefit immediately by reducing its payroll tax payments or obtaining an advance credit from the IRS.
Update: The Consolidated Appropriations Act (CAA) extends and enhances the credit for the first two quarters of 2021. Notably, the CAA effectively increases the maximum credit to $14,000 per employee. In addition, unlike prior law, an employer that receives a Paycheck Protection Program (PPP) loan may now qualify for the ERC on wages that are not paid with forgivable PPP loan proceeds, retroactive to March 27, 2020.
- Family and medical leave credit: Signed shortly before the CARES Act, the Family First Coronavirus Response Act (FFCRA) allows a tax credit for qualified employers if they provide paid family and medical leave to employees. Employers are eligible for this credit if they provided paid leave to employees for COVID-19 related reasons. This includes employees who are subject to a government quarantine or isolation order or those who experience COVID-19 symptoms but have not yet received a diagnosis.
This tax credit was scheduled to expire on December 31, 2020. However, the CAA extends the credit through March 31, 2021, with certain modifications.
As before, the credit is not available for employees who have exhausted their leave entitlements. But an employer may still voluntarily provide paid leave to these workers.
- Payroll tax deferral: Under the CARES Act, an employer affected by the COVID-19 pandemic is authorized to defer some payroll taxes that typically would have been due in 2020. This deferral applies to the employer’s share of the Social Security tax component. The deferral period spans March 27, 2020, through December 31, 2020.
A business is required to pay the deferred payroll tax amount in two installments. It must pay 50% by December 31, 2021 and the remaining 50% by December 31, 2022.
This payroll tax deferral option is available to all employers without any requirement to show a COVID-19 related impact. The CAA did not extend this deferral.
Note: Other recent developments may have an impact on your company’s payroll taxes. Contact your professional tax advisor for guidance.