Some provisions affect the availability of other options. (Updated 4-15-2020)
Beginning March 27, 2020, employers will be presented with a variety of new tax credits, forgivable loans and tax deferral options under two recently enacted laws: The Families First Coronavirus Response Act ("FFCRA") and the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). An employer, however, may not be able to apply more than one program at a time (i.e., with respect to the same employees and wages paid). Employers will need to assess which of these new options are best for their circumstances. This article summarizes some of these new programs and explains the restrictions and other considerations that apply.
1. Deferral of Employer Social Security taxes (CARES Act, Section 2302)
Beginning March 27, 2020, all employers may elect to defer payment of the 6.2% employer Social Security tax through December 31, 2020. Deferred tax amounts would be paid in equal amounts over two years, with payments due on December 31, 2021 and December 31, 2022.
However, there are other tax credit and loan programs that may offer greater benefits to employers than a tax payment deferral, including the following:
- New Paid Sick/Family Leave Credit (FFRCA Sections 7001 & 7003), or
- New Employee Retention Credit (CARES Act Section 2301)
- New Paycheck Protection Program loans (CARES Act Section 1102)
- Small Business Research Credit (§ 41(h) of the Internal Revenue Code (IRC),
- Qualified Veterans Credit (§ 51 of the IRC), and
- Employer Credit for Paid Family and Medical Leave (§ 45S of the IRC)
- Deferral is not available to employers after determination of loan forgiveness through the Paycheck Protection Program ("PPP") (Section 1102 of the CARES Act, summarized below.)
Further, although some of the options explained below may be available in addition to deferring employer Social Security tax, the tax credits covered below generally apply to employer Social Security taxes, potentially reducing or even eliminating such taxes for the balance of 2020.
As a deferral, these taxes will become collectible by the IRS starting in December 2021. Employers should keep careful track of amounts accrued and be prepared to pay the amounts when due.
2. Paid Sick/Family Leave Tax credits (FFRCA Sections 7001, 7003)
Under the FFRCA, employers with fewer than 500 employees are generally required to offer paid family leave and paid sick leave to employees who are unable to work (or telework) and who meet specified conditions related to COVID-19. Leave amounts are limited. Private sector employers with less than 500 employees are allowed a credit against employer Social Security tax liability equal to 100 percent of the qualified sick leave wages paid, plus the proportionate share of health care costs incurred and the applicable employer Medicare tax on such wages. The tax credits are intended to cover all costs related to this family/sick leave, and apply to employer Social Security taxes. However, IRS guidance has clarified that FFRCA tax credits may be applied to all employment taxes, and that remaining overpayments are refundable.
In some cases, such as closure of a business, the Treasury Department and IRS will process claims for advance payments of the tax credit via IRS Form 7200.
- Credit applied during the quarter may not exceed the total employer Social Security tax, but excess amounts may be refunded.
- Credit is reduced by any Small Business Research Credit or Qualified Veterans Credit.
- Credit is reduced by any Paid Family and Medical Leave Credit.
3. Employee Retention Credit for Closures Due to Covid-19 (CARES Act Sec. 2301)
All private sector employers (including non-profit organizations) may claim a refundable tax credit against employer Social Security tax equal to 50 percent of wages paid during the COVID-19 crisis, up to $10,000 in wages per employee. This generally applies to employers that were in operation in 2020 and whose operation is fully or partially suspended due to COVID-19. Private sector employers may also qualify if they experienced a 50% decline in gross receipts, as compared to the same quarter of the prior year. A private sector employer's eligibility ends with the calendar quarter following the first calendar quarter in which the gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year.
- For employers with more than 100 employees, this credit is for wages paid to employees that provided no services during the shut-down.
- For employers with 100 or less employees, all wages qualify for the credit without regard to whether the employee worked or the employer was in operation.
As with the FFCRA tax credits, IRS guidance has clarified that these tax credits may be applied to all employment taxes, and that remaining overpayments are refundable.
Aggregation rules apply for determining whether an employer meets the 100-employee threshold; i.e., employers that are related under IRC Sections 52 or 414 will be treated as a single employer. This section applies to wages paid after March 12, 2020 and before January 1, 2021.
- Employers that obtain PPP loans (CARES Act Section 1102, discussed below) are not eligible for the Employee Retention Credit.
- Conversely, employers that receive this credit are not eligible for Paycheck Protection Program loans.
- Credit is reduced by any Paid Family and Medical Leave Credit under IRC § 45S.
- Excludes paid sick leave or paid family leave wages paid under the FFCRA, however, this credit may apply to wages paid to the same employee once they return to work.
- Excludes wages paid for which the employer receives Work Opportunity Tax Credit (WOTC)
4. Paycheck Protection Program ("PPP") (CARES Act, Sec. 1102)
Businesses and nonprofit organizations with less than 500 employees are eligible for a new loan program through June 30, 2020, which will provide federally-guaranteed loans in amounts approximately equivalent to ten weeks of payroll costs. Loan proceeds can pay for payroll, rent, health care and other costs, and are forgivable based on employment and wage levels maintained by employers. Businesses must have been in operation, with employees, on February 15, 2020.
There are special rules for determining the 500 employee limit; for example, for employers in the Hospitality and Food Service industries (NAICS code 72), the 500 employee limit may be determined based on the number of employees per physical location. Certain franchises may also qualify as separate businesses.
Loan amounts are determined based on 250% of average monthly payroll costs, taking into consideration average wages paid during a one-year period preceding the loan, up to a limit of $10 million. There are alternate periods for seasonal employers and those not in business in the prior year.
In addition to wages, commissions and other compensation, the calculation of payroll costs includes health care costs such as insurance premiums, state/local employer taxes and other specified costs. However, this calculation excludes the proportionate share of annual wages over $100,000 per employee, as well as federal employer taxes (Social Security/Medicare and FUTA).
Such loans are forgivable to the extent that employers maintain specified employment and wage levels. Funds may be used to retain workers and maintain payroll, and to pay for such expenses as mortgages, rent, health care, utilities and other specified expenses (although non-payroll costs are limited to 25% of the loan amount). Loan amounts forgiven are excluded from taxable income for federal income tax purposes.
To determine the amount that will be forgiven, the average number of full-time equivalent employees per month will be compared to either the prior-year period or January through February of 2020. An alternate calculation may apply for seasonal employers. A similar comparison will apply to wage levels. Repayment of a proportionate part of the loan may be required if earnings of any employee is reduced by 25% or more compared to the most recent full quarter of employment before the covered period. However, this rule may not apply to employees who received, for any single pay period in 2019, annualized earnings over $100,000 (e.g., over $8,333 per month or $4,167 for a semimonthly pay period, in 2019). Special relief provisions apply for employers who rehire employees or eliminate wage reductions by June 30, 2020.
Lenders will be required to obtain specified documentation to demonstrate employment and wage levels through the period.
- Loan proceeds may not be used to pay:
- wages exceeding $100,000 per employee (prorated for the covered period; e.g., wages over $8,333 per month for an employee);
- Federal employer-paid taxes (Social Security/Medicare, FUTA)
- Employees who live outside the U.S
- FFCRA paid sick or family leave wages for which credit is allowed
- Employers that participate in the PPP may not defer employer Social Security taxes after a determination of forgiveness of a PPP loan. (However, amounts deferred up to that date will remain deferred and due in December 2021 and 2022.)
- Employers that receive the Employee Retention Credit are not eligible for the PPP.
Employers should consult with appropriate legal and tax professionals to assess which of these alternatives best meets their needs and circumstances.
Important related content
- COVID-19 Workplace Impact and Employer FAQs: The Families First Coronavirus Response Act See subsections: Emergency Family and Medical Leave Expansion Act (Emergency FMLA Act), Emergency Paid Sick Leave Act, and Tax Credits for Paid Sick and Paid Family and Medical Leave.
- DOL Releases New Guidance on Families First Coronavirus Response Act (FFCRA) A summary of the recent clarifications of components of the FFRCA incluing topics such as effective date, exceptions, calculating paid sick leave, documentation and more.
- Find FAQs, checklists, webcasts, and the resources to help you protect and manage your workforce here: ADP Employer Preparedness Toolkit — Coronavirus Disease (COVID-19)
The information provided by ADP is for general informational purposes only and is not legal, accounting or tax advice. The information and services ADP provides should not be deemed a substitute for the advice of such professionals who can better address your specific concern and situation. Any information provided here is by nature subject to revision and may not be the most current information available on the subject matter discussed.
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