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Congress Provides Payroll Tax Credits to Employers Coping with the Coronavirus Pandemic

Tax, Benefits, and Private Client

Recently enacted legislation related to COVID-19 allows an eligible employer to claim tax credits if the employer is required to pay certain sick or family leave wages to employees who are unable to work due to circumstances related to COVID-19 or if the employer’s business has been financially impacted by COVID-19.

Below is a summary of the legislation that created the tax credits followed by (i) a description of which employers are eligible for the tax credits, how the credits are calculated, and how employers can obtain the financial benefit of the credits, and (ii) a chart comparing the two types of credits.

FAMILIES FIRST CORONAVIRUS RESPONSE ACT

The Families First Coronavirus Response Act (“FFCRA”), enacted on March 18, 2020, requires employers with less than 500 employees to provide paid leave to employees under two provisions: (i) the Employee Paid Sick Leave Act (“EPSL”) and the Emergency Family and Medical Leave Expansion Act (“Expanded FMLA”).

Under the EPSL, an eligible employee is entitled to (i) up to two weeks of fully-paid sick leave if the employee is unable to work because of COVID-19, or (ii) up to two weeks of leave at two-thirds pay if the employee is caring for children who are home because their schools or places of care are closed (or their places of care are unavailable) due to the impact of COVID-19.

Pursuant to the Expanded FMLA, an employee who has been employed for at least 30 calendar days is entitled to an additional 10 weeks of leave at two-thirds pay if the employee is caring for children who are home because their schools or places of care are closed (or their child care providers are unavailable) due to the impact of COVID-19.

Employees are eligible for paid leave under the Expanded FMLA only if the employee is unable to work or telework in order to care for to a child whose school or place of care is closed (or whose childcare provider is unavailable) for reasons related to COVID-19. Employees are entitled to paid leave under the EPSL if the employee is unable to work or telework because the employee:

  • is subject to a federal, state, or local quarantine or isolation order related to COVID-19;
  • has been advised by a health care provider to self-quarantine due to reasons related COVID-19;
  • is experiencing symptoms of COVID-19 and is seeking a medical diagnosis;
  • is caring for a person subject to a quarantine or isolation order related to COVID-19 or who has been advised by a health care provider to self-quarantine due to reasons related to COVID-19;
  • is caring for a child of the employee whose school or place of care is closed (or whose childcare provider is unavailable) due to reasons related to COVID-19; or
  • is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was enacted on March 27, 2020, encourages eligible employers to retain their employees in spite of the employer’s businesses being financially impacted as a result of COVID-19-related precautions. Employers are not required to pay employees under the CARES Act, but must do so in order to receive the benefit of the tax credits (“employee retention credits”).  

OVERVIEW OF THE TAX CREDITS

FFCRA Tax Credits

The FFCRA provides employers (including tax-exempt organizations) with less than 500 employees with a tax credit with respect to wages required to paid under the EPSL, i.e., qualified sick leave wages, and wages required to paid under the Expanded FMLA, i.e., qualified family leave wages. Qualified sick leaves wages may be either wages an employer is required to pay to an employee who is unable to work or telework because of either the employee’s personal health status or the employee’s need to care for children.

Qualified family leave wages are wages that an employer is required to pay to an employee only if the employee is caring for a child whose school or place of care is closed (or in the case of a childcare provider, unavailable) due to COVID-19-related reasons.

The amount of the credits under the FFCRA cover 100 percent of the qualified sick leave wages and qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an employer paid during a calendar quarter, plus the amount of the employer’s share of the 1.45 percent Medicare tax imposed on those wages. Qualified health plan expenses are amounts paid or incurred by an employer to provide and maintain a group health plan that are allocable to the employee’s qualified sick leave or qualified family leave wages.

An independent contractor or other self-employed individual is eligible for refundable credits under the FFCRA against their federal self-employment income tax if the individual would be entitled to qualified sick leave or qualified family leave wages if the individual were an employee of an eligible employer (other than himself or herself). The amount of the credit for any taxable year is equal to the “qualified sick leave equivalent amount” or the “qualified family leave equivalent amount.”

In the case of an eligible self-employed individual caring for a child whose school or place of care has closed (or whose child care provider is unavailable) due to COVID-19, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services because of the need to care for a child, multiplied by the lesser of $200 or 67 percent of the “average daily self-employment income” of the individual for the taxable year. The term “average daily self-employment income” means an amount equal to the net earnings from self-employment of the individual for the taxable year, divided by 260. For eligible self-employed individuals who must self-isolate, obtain a diagnosis, or comply with a self-isolation recommendation, the qualified sick leave equivalent amount is capped at the lesser of $511 per day or the average daily self-employment income for the taxable year per day. In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten.

A self-employed individual that would be entitled to receive paid leave pursuant to the Expanded FMLA if the individual were an employee of an employer (other than himself or herself) is entitled to a credit equal to the qualified family leave equivalent amount. The qualified family leave equivalent amount is equal to the number of days (up to 50) during the taxable year that the self-employed individual cannot perform services for reasons that would have entitled the individual to paid leave pursuant to the Expanded FMLA, multiplied by the lesser of $200 or 67 percent of the average daily self-employment income for the taxable year per day.

Qualified leave wages for which an eligible employer receives tax credits are not eligible as “payroll costs” for purposes of determining the portion of a paycheck protection program loan that may be forgiven under the CARES Act. 

CARES Act Employee Retention Credit

The CARES Act provides eligible employers with an employee retention tax credit in an amount equal to 50 percent of “qualified wages” that the employers pay to their employees. Qualified wages are wages paid by an eligible employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the eligible employer’s qualified health plan expenses that are properly allocable to the wages.

Whether wages are qualified wages also depends on the average number of full-time employees employed by the eligible employer during 2019. Generally, a “full-time employee” means an employee who is employed on average at least 30 hours of service per week.

If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee during a period the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. An eligible employer that averaged more than 100 full-time employees in 2019 takes into account as qualified wages only what an employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If an eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship.

The maximum amount of qualified wages taken into account with respect to each employee, for all calendar quarters is $10,000, so that the maximum amount of the employee retention credit for an eligible employer for qualified wages paid to each employee is $5,000.

An employer is an eligible employer for purposes of the employee retention credit (and is treated as suffering an economic hardship) if the employer carries on a trade or business during 2020 (including a tax-exempt organization) that either (i) fully or partially suspends its operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or (ii) experiences a “significant decline” in gross receipts during the calendar quarter.

According to the IRS, the operation of a business is treated as a partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.

Note: One question requiring clarification from the IRS is whether an employer that moves to tele-working could take the position that they had experienced a partial shutdown for purposes of determining qualified wages if the employer did so prior to a government restriction on going to work.

A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.

Eligible employers may not receive both the employee retention credit and a small business interruption loan under the paycheck protection program under the CARES Act.

No Double Dipping

Employers are eligible to claim both the credits under the FFCRA and CARES Act, but the amount of qualified wages for which an employer may claim the credit under the CARES Act does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.

CLAIMING THE COVID-19 TAX CREDITS

The tax credits available under the FFCRA and the employee retention credit available under the CARES Act are claimed by reporting total qualified sick and family leave wages and qualified wages, respectively, and the related credits for each calendar quarter on the employer’s federal employment tax returns (generally, Form 941, Employer's Quarterly Federal Tax Return).

The FFCRA and CARES Act tax credits are allowed against the employer portion of Social Security taxes (also known as the Old-Age, Survivors, and Disability Insurance tax), which equals 6.2 percent of employee wages for each calendar quarter. However, the credits are fully refundable. What this means is that if, for any calendar quarter the amount of the credit is more than the employer’s Social Security tax liability for that quarter, the excess may be applied to offset all other federal employment taxes owed by the employer for that quarter. In other words, employers may obtain the financial benefit of the credits for a quarter by retaining, and not depositing with the IRS, withheld federal income taxes, the employee share of Social Security and Medicare taxes, and the employer share of Social Security and Medicare taxes, with respect to all employees for the quarter, up to the amount of the credits.

IRS guidance contains examples illustrating application of these rules.

Example: FFCRA Tax Credits

An eligible employer that paid $5,000 during a calendar quarter in qualified sick leave wages and qualified family leave wages (and allocable health plan expenses and the eligible employer’s share of Medicare tax on the qualified leave wages) and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter. The eligible employer may keep up to $5,000 of the $8,000 of taxes the eligible employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The eligible employer is then only required to deposit the remaining $3,000 on its required deposit date. The eligible employer will later account for the $5,000 it retained when it files Form 941, for the quarter.

Example: Employee Retention Credit

An eligible employer paid $10,000 during a calendar quarter in qualified wages (including qualified health plan expenses) and is therefore entitled to a $5,000 credit, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter. The eligible employer may keep up to $5,000 of the $8,000 of taxes the eligible employer was going to deposit, and it will not owe a penalty for keeping the $5,000. The eligible employer is required to deposit only the remaining $3,000 on its required deposit date. The eligible employer will later account for the $5,000 it retained when it files Form 941, for the quarter.

REQUESTING ADVANCE PAYMENTS FOR FFCRA AND CARES ACT TAX CREDITS

To the extent the retained employment tax deposits are insufficient to cover the amount of an employer’s expected credits under the FFCRA or the CARES Act, an employer may file new IRS Form 7200 to request advance payments of the difference. An employer must first reduce its employment tax deposits to account for the credits before filing Form 7200.

An employer that reduces its federal employment tax deposits cannot apply for advance payments for the same expected tax credit. Employers may file several Forms 7200 to request advance payments of the credits attributable to multiple deposits. The form must be filed at any time before the end of the month following the applicable quarter. The IRS has announced that it expects to process these requests in two weeks or less. 

An employer is not required to file Form 7200 unless they are requesting advance payments of the tax credits. In lieu of filing Form 7200, employers can claim the refundable portions of the tax credits when they file their quarterly Form 941.

Self-employed individuals claiming refundable credits under the FFCRA for qualified sick leave equivalent amounts or qualified family leave equivalent amounts cannot obtain advance credits, and therefore, should not file Form 7200. Instead, a self-employed individual should claim the refundable credits on the individual’s Form 1040, U.S. Individual Tax Return, and may effectively reduce payments of estimated income taxes that the individual would otherwise be required to pay by taking into account the credits to which the individual is entitled and will claim on Form 1040.

Example: Advance Payments of COVID-19 Tax Credits

The instructions to Form 7200 contain the following example showing how an employer could reduce its employment tax deposits and claim an advance payment for the excess of the employer’s credit over the amount of the retained tax deposits:

An employer entitled to a $10,000 credit under the CARES Act that is required to deposit $8,000 in employment taxes could retain the entire $8,000 of taxes as a portion of the tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using Form 7200.

CARES ACT SOCIAL SECURITY TAX DEFERRAL

Under the CARES Act, all employers may defer without penalty the employer’s portion of Social Security taxes that would otherwise be due through December 31, 2020. One half of the deferred taxes must be deposited by December 31, 2021, and any remaining deferred taxes must be deposited by December 31, 2022. An employer cannot avail themselves of this deferral if the employer obtains a small business interruption loan under the CARES Act paycheck protection and the loan is forgiven under the CARES Act loan forgiveness provisions.

Note: A question raised by this provision is how the IRS intends to address a situation in which an employer begins deferral, but at some later point has a paycheck protection program loan forgiven. Presumably, that will not cause the employer to entirely lose the deferral, but only deferral past the date the loan is forgiven.

Self-employed taxpayers who would otherwise have self-employment tax estimated tax payments due through December 31, 2020, may defer without penalty 50 percent of such tax in two installments: (1) 25 percent is due by December 31, 2021, and (2) any remaining deferred self-employment taxes are due by December 31, 2022.

COMPARISON OF THE TAX CREDITS MADE AVAILABLE BY THE FFCRA AND CARES ACT

 

FFCRA

CARES Act

Focus

Refundable tax credits for employers required to pay qualified sick leave wages and qualified family leave wages designed to financially assist small and midsize businesses during the COVID-19 pandemic.

Refundable tax credit for employers who pay qualified wages (including qualified health plan expenses) designed to incentivize employers to retain employees during the COVID-19 pandemic.

Eligible Employers

Businesses and tax-exempt organizations (1) with fewer than 500 employees (2) that are required under the FFCRA to provide qualified sick leave wages and/or qualified family leave wages.

 

A business is treated as having fewer than 500 employees if, at the time an employee’s leave is to be taken, the business employs fewer than 500 full-time and part-time employees within the United States (including the District of Columbia, or any territory or possession of the United States).

 

Government employers are not eligible.

Businesses and tax-exempt organizations that either (1) fully or partially suspend their operations during any calendar quarter in 2020 due to government authority limiting commerce, travel, or group meetings due to COVID-19 or (2) experience a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.

 

Government employers are not eligible.

Periods Covered

Eligible employers may claim tax credits for qualified sick leave wages and qualified family leave wages paid to employees for leave taken beginning on April 1, 2020, and ending on December 31, 2020.

Eligible employers may claim tax credits with respect to wages paid after March 12, 2020, and before January 1, 2021.

Amount of Credit

100 percent of up to two weeks of the qualified sick leave wages and up to 10 weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare taxes imposed on those wages.

With respect to each eligible employee, the maximum amount of the credit is 50 percent of up to $10,000 in qualified wages paid to such employee by an eligible employer to an whose business has been financially impacted by COVID-19.

 

The calculation of qualified wages depends on the size of the eligible employer. If the employer employs more than 100 full-time employees, only those employees not providing services due to a suspension of the business are considered in calculating qualified wages. The calculation of qualified wages for eligible employers with 100 or fewer full-time employees considers the wages paid to all employees, regardless of whether the employee is providing services.

Eligibility for the Credits

Eligible employers claiming the credits for qualified leave wages (and allocable qualified health plan expenses and the eligible employer’s share of Medicare taxes), must retain records and documentation related to and supporting each employee’s leave to substantiate the claim for the credits.

(1) Operation of a business that is suspended in whole or in part by an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 (a partial suspension may be established where the operation of the business can still continue to operate but not at its normal capacity); or

 

(2) The business experiences a “significant decline” in gross receipts. A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. A business’s significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.

Eligibility to Reduce Employment Tax Deposits Attributable to the Refundable Portion of the Credits

Eligible.

Eligible.

Eligibility for Advance Payments of the Credits

Eligible.

Eligible.

Self-Employed Individuals

Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”

Not eligible.

Payroll Tax Deferral

 

Not applicable.

An employer’s portion of Social Security payroll taxes that would otherwise be due through December 31, 2020 can be deferred in two installments: (1) 50 percent due on December 31, 2021 and (2) 50 percent due on December 31, 2022.

 

Self-employed taxpayers who would otherwise have self-employment tax due through December 31, 2020 can defer 50 percent of such tax in two installments: (1) 25 percent due on December 31, 2021 and (2) 25 percent due on December 31, 2022.

 

This deferral cannot be used by an employer that obtains a small business interruption loan under the CARES Act paycheck protection and the loan is forgiven under the CARES Act loan forgiveness provisions.

Eligibility for Credit and Small Business Interruption Loan Under the CARES Act

Qualified leave wages for which an eligible employer receives tax credits are not eligible as “payroll costs” for purposes of determining the portion of a paycheck protection program loan that may be forgiven under the CARES Act.

Eligible employers may not receive both the employee retention credit and a small business interruption loan under the paycheck protection program under the CARES Act.

© 2020 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.