Payroll Tax Deferrals and Credits Under the CARES Act

Although many employers are familiar with the payroll tax credits made available by the Families First Coronavirus Response Act (“FFCRA”), they may not be as familiar with the tax credit and deferral programs available under the Coronavirus Aid, Relief, and Economic Stimulus Act (“CARES Act”).  Although we touched on these programs in a prior post, we will address them more fully in this post.

Payroll Tax Deferral

The CARES Act allows for a deferral of an employer’s portion of the Social Security tax from March 27, 2020 through December 31, 2020.  An employer choosing to defer these taxes must pay 50% of the taxes on December 31, 2021 and the remaining 50% on December 31, 2022.  If the employer meets these deadlines, it will avoid the sizable penalties associated with failing to deposit such taxes.

Notably, the tax deferral is not applicable if the employer has had indebtedness forgiveness under the CARES Act’s Payroll Protection Program (“PPP”), which we addressed in a prior post.

Employee Retention Credit

The CARES Act provides a refundable credit of 50% of the “qualified wages” of each employee of an “eligible employer.”  The credit, which is calculated on a quarterly basis between March 12, 2020 through December 31, 2020, is applied against the employer’s portion of the Social Security tax.  The credit cannot exceed $5,000.00 per employee.

What Businesses Are Eligible for the Credit? 

Any private employer, no matter its size, can be eligible if: (1) it does not take a PPP loan and (2) it satisfies one of the following two tests. 

First, a business will be eligible if it carried on a trade or business during 2020 and its operations were fully or partially suspended in any calendar quarter in 2020 because of a government order limiting business activity (e.g., commerce, travel or group meetings for commercial, social, religious, religious, or other purposes) due to COVID-19.

Second, a business will be eligible if its gross receipts for a quarter in 2020 are less than half of its gross receipts for the same quarter in 2019.  A business’s eligibility for this credit ceases after a quarter in which its gross receipts are greater than 80% of the prior year’s quarterly gross receipts.  Notably, this test is not available to tax-exempt organizations.

What Wages are “Qualified”?

It depends on the average number of full-time employees (i.e., those who work on average at least 30 hours per week) that an eligible employer had during 2019.

If the average number of full-time employees employed by an eligible employer during 2019 exceeded 100, “qualified wages” are those that were paid to an employee who is not providing services due to a COVID-19 order or a significant decline in gross receipts (i.e., an employee who is furloughed or laid off).  If an employee is performing services on a reduced schedule, wages paid are only “qualified” if they exceeded what the employee would have otherwise been paid for the services performed.

If the average number of full-time employees employed by an eligible employer during 2019 was 100 or less, “qualified wages” are those that were paid to all employees due to a COVD-19 order or a significant decline in gross receipts.  This is true whether or not the employee is providing services to the employer.

“Qualified wages” also include healthcare costs paid by an employer to maintain a group health plan that are allocated to the wages.  They do not, however, include wages corresponding to a paid leave entitlement mandated by the FFCRA.

How Does the Credit Work?

In recent guidance, the IRS indicated that the employer keeps the withheld payroll taxes each quarter in an amount up to that of the credit.  Starting with the second quarter of 2020, the employer can receive a payment from the IRS if the amount of the credit exceeds required employment tax deposits.

For questions about this or any other labor and employment topic, please do not hesitate to contact the attorneys at Hoffman & Hlavac.

George Hlavac