The Coronavirus Aid, Relief and Economic Security (CARES) Act comes with a $2.2 trillion price tag but will hopefully help stabilize the economy as the United States (and the world) continues to combat COVID-19. In this article, we will be discussing two key factors for businesses - payroll deferral and the employee retention credit.
The payroll deferral measure aims to free up cash flow and encourage retention of employees during quarantine or shutdown. For the period March 27, 2020, through December 31, 2020, all employers may defer 100% of applicable payroll taxes, and self-employed individuals may defer 50 percent of applicable payroll taxes, without penalty. The applicable payroll tax that can be deferred is only the employer's 6.2% Social Security tax. The 1.45% Medicare tax is still required to be paid timely. Half of the amount deferred is due on December 31, 2021. The remaining half is due December 31, 2022.
Those employers that utilize a certified professional employer organization (CPEO) may direct the CPEO to defer payment of the Social Security tax. The employer, not the CPEO, is liable for payment of the deferred tax.
The payroll deferral is not available to employers that have debt forgiven as part of the CARES Act via a loan under the Paycheck Protection Program of the Small Business Act or a loan under U.S. Treasury Program Management Authority. For more details on these and other loans under the CARES Act see our previous article Paycheck Protection and SBA Loans.
Employee Retention Credit
The CARES Act includes a provision for a refundable quarterly credit against employment taxes for employers retaining their employees who are not working either due to a full or partial cessation of business or a significant decline in gross receipts. The credit applies to wages paid during the period March 12, 2020 through December 31, 2020. This provision includes several requirements defining qualified wages, qualified employees, and qualified employers. Ultimately, the employee retention credit allowed is equal to 50% of qualified wages up to $10,000, with the maximum credit being $5,000 per employee.
To be a qualified employer, the business must have been carrying on during the 2020 calendar year and is either:
- one whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, trade, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19, or
- one whose gross receipts have decreased 50% for the same calendar quarter in the prior year. This decrease in gross receipts is recognized until the gross receipts for the current calendar quarter are greater than 80% of gross receipts for the same calendar quarter in the prior year.
Governmental employers are not eligible to be considered a qualified employer.
Once a business is considered a qualified employer, it has to determine which employees are qualified employees. The definition of qualified employee is based on whether the employer had more than 100 full-time employees or 100 or fewer full-time employees during 2019.
If an employer had more than 100 full-time employees, an employee will be qualified if he/she is unable to provide services due to business suspension or gross receipts decline, as detailed above.
If an employer had 100 or fewer employees, an employee will be qualified as long as the business suspension or gross receipts circumstances detailed above are met. Whether or not the employee is able to provide services is not a factor when there are 100 or fewer employees.
The amount of qualified wages for which the credit can be claimed includes health benefits. In addition, the qualified wages may not exceed the amount each qualified employee would have been paid for working an equivalent amount of time during the 30 days immediately preceding such quarter.
Lastly, it is important to note there are limitations to this credit (similar to limitations for the payroll deferral). Qualified employers are unable to count wages used to determine the employee retention credit in the calculation of other credits such as the Work Opportunity Tax Credit or the Employer Credit for Paid Family and Medical Leave. Also, qualified employers that receive small business interruption loans (covered in our previous article Paycheck Protection and SBA Loans) are not eligible for the employee retention credit.
To discuss these provisions or any others in the CARES Act or any other COVID-19-related legislation, please contact your HLB Gross Collins, P.C. adviser.