Cash Flow Benefits for Employers Affected by COVID-19
Impacts of the Coronavirus (“COVID-19”) are hurting businesses and nonprofit organizations of all sizes, causing many employers to experience unforeseen economic hardship. Many businesses, both small and large, seek cash to cover urgent employee costs, rents, and other debts during these times. Employers should consider their eligibility under certain favorable provisions of new tax legislation to generate immediate benefits. Three recently enacted payroll provisions provide employers with federal tax credits and short-term interest-free loans and employees with wages when they cannot work.
Components of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act and the Families First Coronavirus Response Act (“FFCRA”) provide relief to employers. Under the CARES Act, benefits include the refundable employee retention credit that can reduce current and future payroll tax deposits and the opportunity to defer tax payments of employer OASDI tax. Under the FFCRA, employers with fewer than 500 employees (determined on an integrated employer basis) are required to pay sick leave wages and FMLA wages, but in return employers can be reimbursed through refundable payroll tax credits.
CARES Act Employee Retention Credit
The Employee Retention Credit is available to all employers, except those who have taken a Paycheck Protection Program loan. In 2020, the credit applies when a trade or business or nonprofit organization:
- Is suspended or partially suspended due to government orders limiting commerce, travel or group meetings due to COVID-19, or
- Has gross receipts during a quarter in 2020 that are less than 50 percent of gross receipts for the same quarter in 2019. This provision ends in the quarter following the quarter in which gross receipts are more than 80 percent of gross receipts for the same quarter in 2019.
The Employee Retention Credit is available for wages paid after March 12, 2020, and before January 1, 2021. The credit is limited to $5,000 – a maximum of 50 percent of up to $10,000 in qualified wages and health benefits paid to each employee. Employers with more than 100 full time employees calculate the credit using only the wages and healthcare costs of employees who are not providing services during the periods discussed above. For employers with 100 or fewer workers, all wages and healthcare costs of employees (both working and nonworking) can be used to generate the credit.
The Employee Retention Credit is used to offset employer OASDI tax for all employees. If the credit exceeds the OASDI tax for any payroll tax deposit, the employer can reduce other federal employee and employer payroll taxes due with that deposit. If the credit exceeds the total payroll tax deposit due, the employer can request an immediate refund of the remaining excess credit by filing Form 7200. The Employee Retention Credit is a way to help employers retain their workforce, partially funded with immediate reduction of payroll tax payments.
Use this link to review the IRS FAQs for the Employee Retention Credit.
CARES Act Deferral of Employment Tax Deposits
The CARES Act allows employers to defer the deposit and payment of the employer’s share of OASDI tax. This deferral is available to all employers, regardless of size. However, an employer that receives a Payroll Protection Program (“PPP”) loan may not defer employer OASDI tax on or after the date the PPP loan is forgiven. For employers who defer, 50 percent of the deferred tax is due by December 31, 2021, and the remaining 50 percent is due by December 31, 2022.
If a third party professional employer organization (“PEO”) or other payroll provider is responsible for making the payroll tax deposits, the employer must direct that third party not to pay the amounts eligible for deferral. The employer then assumes sole responsibility for the payment due by the due dates discussed above. The deferral of payroll tax payments can be viewed as a short-term, interest-free-loan loan from the government to assist employers during the COVID-19 crisis.
Review the IRS FAQs for the Employment Tax Deferral.
FFCRA Mandated Paid Sick Leave and Paid FMLA Leave
Beginning April 1, 2020, employers with fewer than 500 employees are required to provide paid sick leave for 10 days or up to 80 hours to any employee unable to work or telework if the employee:
- Is subject to federal, state, or local quarantine or isolation related to COVID-19;
- Is self-quarantined as advised by a healthcare provider because of COVID-19 related concerns;
- Has COVID-19 symptoms and is awaiting medical diagnosis;
- Is caring for a child at home because a school or childcare facility is closed or a childcare provider is unavailable due to COVID-19;
- Is caring for an individual that is under federal, state, or local quarantine related to COVID-19 or self-quarantined as advised by a healthcare provider because of COVID-19 symptoms; or,
- Has other symptoms outlined by the Secretary of Health and Human Services, in consultation with the Department of the Treasury and the Department of Labor.
In addition, employers with fewer than 500 employees are required to provide eligible employees up to 10 weeks of paid leave under the Family and Medical Leave Act (“FMLA”), if the employee is unable to work or telework as a result of caring for a child whose school is closed or whose childcare provider is unavailable due to COVID-19.
Employees requesting leave under items 1, 2 and 3 above are entitled to pay equal to their regular rate of pay. Payments are limited to $511/day and $5,110 in total. Employees caring for others under items 4, 5, and 6 above are entitled to two-thirds of their regular rate of pay limited to $200 per day and $2,000 in total. Paid leave for eligible part-time employees will be calculated using the equivalent rate of pay for an average number of hours during a two-week period. An employer may not require an employee to use available sick leave or any other leave before claiming FFCRA paid leave.
Note that the two weeks of paid sick leave for taking care of a son or daughter whose school or child care facility is closed due to COVID-19 combined with the 10 weeks of paid FMLA leave totals twelve weeks of reduced pay.
Employers (other than governments) providing mandated paid sick leave and paid FMLA leave are entitled to refundable employment tax credits equal to 100 percent of these wages. Additional tax credits can be claimed for employer payments of health care expenses for these individuals during the FFCRA paid leave and the employer’s share of Medicare tax due on these wages. In addition, FFCRA paid leave wages are not subject to the employer share of OASDI tax. As with the Employee Retention Credit, the employer can immediately reduce total payroll tax deposits by the amount of FFCRA leave credits generated from paying these mandated wages. Any wages and healthcare costs that are reimbursed by payroll tax credits are not deductible for income tax purposes.
Use these links to review the Department of Labor and IRS FAQs for the Mandated Paid Leave. The Dept. of Labor is providing guidance on the mandated payments. The IRS is providing guidance on claiming the credits.
Take Advantage of Employment Credits and Deferral
All employers should first determine if they are required to offer FFCRA mandated paid sick leave and paid FMLA to employees. If so, when these amounts are paid, the employer is entitled to payroll tax credits under the FFCRA.
Second, all employers who have not had a PPP loan forgiven should consider deferring payment of their employer share of OASDI tax.
Third, if an employer does not receive a PPP loan, then the employer should take advantage of the Employee Retention Credit to offset the cost of compensating employees during times when the business is negatively impacted by COVID-19.
Finally, reduce payroll tax deposits for available FFCRA and CARES Act credits and request a refund of any excess credit by filing Form 7200. Form 941 for the 2nd quarter will include a requirement to reconcile all credits, deposits and deferrals incurred during the quarter.