Analysis of Employee Retention Credit and Payroll Tax Deferral Provisions of the CARES Act (Sections 2301 and 2302)

Employee Retention Credit for Employers Subject to Closure Due to Covid-19

  • Eligible Employers are allowed a credit against Applicable Employment Taxes each calendar quarter equal to 50% of Qualified Wages paid to each employee. Taxpayers who receive covered loans under the SBA Paycheck Protection Program (See previous H&W analysis of loan programs under the CARES Act) are ineligible for the Employee Retention Credit.  Recapture provisions will apply in the case of a taxpayer who claims the credit and later receives a Paycheck Protection loan.
  • Eligible Employer means any employer carrying on a trade or business during calendar 2020 for (i) each calendar quarter in which operation of the trade or business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the coronavirus, or (ii) for the period beginning with the first calendar quarter in 2020 in which gross receipts are less than 50% of the same quarter in the prior year and ending with the full calendar quarter immediately after the first calendar quarter for which gross receipts exceed 80% of the same quarter in the prior year.  Note that nonprofit employers qualify based on (i) above, and do not have the requirement to carry on a trade or business.
  • Applicable Employment Taxes means the employer’s share of Social Security taxes.
  • Qualified Wages are wages paid after March 12, 2020 and before January 1, 2021, defined as:
    • In the case of an eligible employer with an average of greater than 100 full-time employees (defined as averaging 30 hours or more per week) during 2019, wages paid to an employee who is not providing services due to circumstances described in (i) or (ii) in the definition of Eligible Employer above, or
    • In the case of an eligible employer with an average of 100 or less full-time employees during 2019, wages paid to an employee regardless of whether or not they provide services during the periods described in (i) or (ii) in the definition of Eligible Employer above.
    • Qualified Wages shall not include any Emergency FMLA or Paid Sick Leave paid under the Families First Coronavirus Response Act.
    • For Eligible Employers with an average of greater than 100 full-time employees, Qualified Wages with respect to an employee for any period may not exceed the amount such employee would have been paid during the 30 days immediately preceding such period.
    • Qualified Wages shall include properly allocable qualified health plan expenses necessary to provide and maintain a group health plan to the extent the amount is paid into an accident or health plan to compensate employees for personal injury or sickness incurred by the employee or employees’ family. Methods for allocation of qualified health plan expenses shall be prescribed by the Treasury, except that such allocation shall be treated as proper if made on the basis of being pro rata among employees and pro rata on the basis of periods of coverage.
    • Controlled groups of corporations, partnerships or proprietorships (more than 50% common ownership), or members of an affiliated service group are treated as a single employer. Regulations are intended to prevent the avoidance of these provisions through the use of separate organizations, employee leasing or other arrangements.
    • Rules are anticipated to exclude wages paid to parties related to employer, or to owners of the employer who directly or indirectly own more than 50% in value of outstanding stock in a corporation, or capital and profits interests in a partnership.
    • Deductible wages of the employer shall be reduced by an amount equal to the credits allowed.
    • Employees for which a WOTC credit is allowed, and wages for which an employer credit for paid FMLA and medical leave are allowed, shall be excluded from the calculations for such period under this section.
    • For Professional Employer Organization (“PEO”) arrangements, the customer will be treated as the employer for purposes of the Employee Retention Credit.
  • Qualified wages with respect to any employee shall not exceed $10,000 for all calendar quarters.
  • The amount of the credit is limited to the applicable employment taxes (reduced by any credits for payment of Emergency FMLA or Paid Sick Leave wages under the Families First Coronavirus Response Act – See previous H&W analysis) on the wages paid to employees for such calendar quarter. However, the amount of the credit in excess of the limitation for any quarter shall be treated as a refundable over-payment.
  • The Treasury will waive any penalty for failure to make a deposit of Applicable Employment Taxes if such failure was due to the reasonable anticipation of the Employee Retention Credit.

Delay of Payment of Employer Payroll Taxes

  • Deposits of Applicable Employment Taxes during the Payroll Tax Deferral Period shall be treated as having been timely deposited if all such deposits are made not later than the Applicable Date.
  • Applicable Employment Taxes means the employer’s share of Social Security tax.
  • The Payroll Tax Deferral Period means the period beginning on March 27, 2020 and ending before January 1, 2021.
  • The Applicable Date shall mean December 31, 2021 with respect to 50% of the deferred taxes and December 31, 2022 with respect to the remaining amount of deferred taxes.
  • Deferral is not available for taxpayers who have indebtedness forgiven under the Paycheck Protection Program.
  • Self-employed persons are eligible to defer 50% of the Social Security component of the self-employment during the Payroll Tax Deferral Period and shall be treated as having been timely paid if all such taxes are paid not later than the Applicable Date.
  • The employer may direct payroll agents and PEOs to defer payment of the Applicable Employment Taxes, but the employer will be solely liable for the payment by the Applicable Date.

Employers are also reminded to make requests for deferrals available with their state and local agencies.  Under Governor Newsom’s executive order during the Coronavirus state of emergency, California’s tax agencies were given authority to extend certain deadlines.  The Employment Development Department (“EDD”) has announced that employers statewide who have been affected by Coronavirus may request up to a 60 day extension of time to file payroll tax returns and make deposits without interest or penalties.  An extension of up to 3 months may be available for taxes and fees administered by the California Department of Tax and Fee Administration (“CDTFA”), which includes sales and use tax and various excise taxes.  Some cities are also offering temporary relief for business taxes and license fees.  Businesses can check the EDD and CDTFA websites, as well as their local cities, for available relief programs.

There are several overlapping limitations and exclusions in the various provisions of the CARES Act, as well as with other sections of the tax code.  Consider these carefully in deciding the path you take to ensure your business receives the greatest benefit available.  For example, one should carefully analyze their strategies relating to the loan programs under the Act as receiving a loan under the Payroll Protection Program will prevent you from receiving the credits or payroll tax deferral described above.  But, the loan forgiveness provisions in that program provide a benefit equal to 100% of the wages paid within certain limits.  The credit above will provide benefits equal to 50% of the wages paid within the limits of that program.  The Payroll Tax Deferral provides a deferral over two years, but not forgiveness or a credit.  Each of the programs has nuances that should be analyzed by a business with its unique facts and circumstances (number of employees, wages paid, impact of the emergency on business conditions, cash flow, etc.).  Starting with the program with the greatest benefits and working through the qualifications before moving on to the next option.

We are available to assist your business in the analysis necessary to develop its plan. Contact us today to speak to our team of experts.