Small businesses can enjoy several types of payroll tax relief on their federal taxes during 2020. The changes include a payroll tax deferral and several refundable payroll tax credits. These changes are temporary and originate from the Coronavirus Aid Relief and Economic Security or CARES Act and the Families First Coronavirus Response Act or FFCRA. Together, these laws help employers and businesses survive during the economic downturn caused by the novel coronavirus pandemic. Here is some information about each of the types of relief that are available to employers during the 2020 calendar year.
Deferral of payroll taxes
Under the CARES Act, employers can enjoy payroll tax relief by deferring the payment of their portions of the Social Security taxes that they would have had to submit to the government from March 27, 2020, and Dec. 31, 2020. Employers must still deduct the employees' portions of Social Security taxes and remit them, but they can defer the 6.2% that the employers would have had to pay. Employers can then pay their deferred Social Security obligations in installments by paying 50% of the total amount owed by Dec. 31, 2021, and the remainder by Dec. 31, 2022.
Businesses are not required to take a special election to defer their payments and deposits. Instead, these changes are reflected on Form 941, which is the employer's quarterly return.
While the option to defer the employer's portion of Social Security taxes is available to most employers, those who received a loan through the Paycheck Protection Program are only allowed to defer their payments until they are notified that their loans have been forgiven. Employers must also continue to pay their portions of Medicare taxes and cannot defer them.
Employee retention credit
The CARES Act also provides a credit for retaining employees to businesses affected by the pandemic. This credit is meant to help employers keep their employees on payroll and is available to a majority of employers. The credit is equal to one-half of the qualified wages up to $10,000 per employee paid between March 12, 2020, and Dec. 31, 2020.
Who is eligible for the employee retention credit?
Qualifying employers are those whose operations have been partially or completely suspended because of government orders related to the pandemic. Alternatively, employers that have experienced a decline of at least 50% in their gross revenues during a relevant quarter as compared to the same quarter during the prior year may also qualify.
The relevant governmental order cannot be a closure recommendation and must instead be a closure mandate. For example, a restaurant or bar that was ordered to close to help to stop the pandemic may qualify, but a retail store that chose to close because of a recommendation might not. A business can also show that it has experienced a drop in revenues of 50% or more to qualify for the credit.
Governmental employers cannot claim the credit. People who are self-employed can claim the credit for the wages that they paid to their employees but not for the wages they paid to themselves. PPP loan recipients are also eligible to defer their payments under the PPP Flexibility Act.
How to claim the credit for employee retention
Businesses can claim the employee retention credit immediately by retaining payroll tax funds in an equivalent amount for their quarterly deposit amounts. Employers can submit Form 7200 to the IRS if the retained payroll taxes will not cover the entire credit to receive advance payments.
Small Business Administration Interruption loans and the credit
Businesses that have received SBA interruption loans are not eligible to receive the credit for employee retention since the credit is meant to serve as an alternative to the loan program. The credit can only be claimed by employers that have not received an interruption loan from the SBA.
Paid leave tax credit
Under the FFCRA, most mid-sized and small businesses are required to give employees paid leave when they are unable to work because of the pandemic. However, this Act also includes tax credits for paid leave on a dollar-for-dollar basis.
Who is eligible for paid leave tax credits?
Most businesses that have less than 500 employees are eligible for paid leave tax credits under the FFCRA and are also subject to the law's requirements to provide leave. Businesses that have fewer than 50 employees can be exempted from the FFCRA's childcare requirements, however. The exemption applies if the business can demonstrate that the childcare expense would threaten the business's viability.
Required paid leave credits
Businesses that have employees who are quarantined, show symptoms, or are diagnosed with COVID-19 can receive 100% credit for each employee who has to take paid sick leave. The business must pay the employee his or her regular wages for up to 80 hours through paid sick leave. The expense will be reimbursed by the tax credit up to $511 per day of the required paid sick leave.
If an employee is forced to take leave to care for a family member for pandemic-related circumstances, including caring for a child whose school is closed or for a family member who is under quarantine, the credit will reimburse the employer for two-thirds of the regular wages up to $200 per day for up to 10 days.
Employers may also claim an additional child care credit at a reimbursement rate of 66.6% of the employee's regular rate for up to 10 weeks under certain circumstances. The credit can be claimed for up to $200 per day.
How to claim the paid leave credits
Businesses that are required by the FFCRA to provide paid leave to an employee because of COVID-19 can subtract the funds they paid for the paid leave from their deposits of payroll taxes, including the employee's and employer's share of Medicare and Social Security taxes and the federal income taxes that would have been paid. Businesses can ask for accelerated refunds if the payroll taxes that they would have paid are insufficient to cover the cost of the provided paid leave.
These temporary changes are effective through Dec. 31, 2020. Businesses can benefit from claiming the refundable payroll tax credits and deferring the payment of their portions of payroll taxes. Tax relief can help businesses to continue operations and to remain viable during the pandemic so that they can survive.