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Tuesday, April 7, 2020

FAQ: CARES Act Relief From Employer Payroll Taxes


Updated April 20, 2020.

Here are answers to some of the most common questions we’re hearing.


What am I eligible for if I have more than 500 employees

The Payroll Tax Expense Deferral and the Employee Retention Credit are available to larger employers.


Can I do both the Payroll Tax Expense Deferral and the Employee Retention Credit?

Yes.


What is the Payroll Tax Expense Deferral?

As of the signing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, all employers can elect to defer the employer portion of Social Security taxes (6.2%). What this means is that the tax is paid later, not now. It puts cash in pockets immediately. The tax accrues and is eventually paid at 50% on December 31, 2021, and 50% on December 31, 2022.

Important! If you have participated in the SBA Paycheck Protection Program (PPP) loan program, you must stop this deferral of employer taxes as soon as you are notified that the loan has been forgiven.

Note: Families First Coronavirus Response Act paid leaves should be excluded from this deferral calculation.


What is the Employee Retention Credit?

This credit is explicitly meant to help employers that suffer financial losses, but still continue to pay workers who are unable to perform their duties. It, like other CARES Act measures, rewards employers that keep employees on the payroll roster. This credit is available for payroll from March 12 to December 31, 2020.

The retention credit is a tax credit — not a deferral — against federal employer taxes. This credit is measured quarterly. If the credit applies, taxes are completely waived.


Which employers can apply for the Employee Retention Credit? What are the details?

  • Any employer not applying for an SBA PPP loan can apply.
  • All employers, regardless of size, that pay qualified wages between March 12 and December 31, 2020, can apply.
  • This credit is available to either:
    • Companies that have suffered losses during a quarter due to a partial or total shut-down mandated by the government due to COVID-19.
    • OR

    • Companies that have seen their receipts fall by at least 50% versus the comparable quarter in 2019. Once their sales/receipts are back up to 80% of the prior year’s comparable quarter, the entity is no longer eligible. These numbers are calculated each quarter.
  • Tax-exempt organizations can participate.
  • In a quarter where there is no shut-down, and receipts are at least 80% of what they were in the comparable quarter in 2019, the credit is no longer available.

How is the Employee Retention Credit calculated?

The credit is equal to 50% of wages plus applicable employer-paid health premiums per person, not to exceed $10,000 in wages earned between March 12 and December 31, 2020. In other words, this amounts to up to $5,000 per person for wages, so it could be powerful savings. A “credit” wipes out taxes. The taxes are never paid (as opposed to deferred). How to calculate it:

  1. Identify qualified wages paid. Qualified wages are those paid by companies to workers who are not performing their job duties when the company is suffering. The intent is to help employers that are continuing to pay workers under tough conditions.
    1. Qualified wages are all wages paid in the affected quarter if the company has 100 employees or less.
    2. For companies with more than 100 employees, qualified wages are only those wages paid to workers who are still getting paid or who are still on payroll to any extent, but who are not able to work due to either an ordered work stoppage/suspension, or because there are simply no sales to make or no business to conduct.
  2. Next, calculate 50% of the qualified wages per person, up to $5,000 maximum per person. For example: $7,000 in quarterly wages amounts to a $3,500 credit, while $20,000 in quarterly wages exceeds the $10,000 limit, and the maximum credit would be $5,000. Now, add health insurance premiums paid for that person in that period, too.

Note: Families First Coronavirus Response Act paid leaves should be excluded from this calculation.


Now that I’ve got my Employee Retention Credit amount, how do I get it back?

This amount can be claimed as a credit against the employer’s quarterly payroll tax return, which is reported on Form 941.

  • If an employer needs to get a credit for a prior quarter, Form 7200 should be filed.
  • If an employer wants to claim a credit in advance, a Form 7200 can be filed.
  • If an employer needs to file more than one Form 7200, that’s fine.

Don’t forget, there are two calculations, one for employers of 100 or less, and one for employers with 101 or more staff.


How does the credit money get to me?

File a Form 7200.

If the tax has already been paid, the refund will be applied to taxes due. If tax is overpaid, a refund will be processed.

This credit is applied against Form 941 taxes withheld each quarter; this means it is applied against both employer and employee FICA, and also against the employee federal income tax withheld and due.

If you have also been deferring your employer’s share of Social Security (6.2%), the credit will need to be reconciled against the deferred taxes. That will be accomplished on a new Form 941, which has yet to be issued. Stay tuned!

Similarly, if your company takes the Research and Development tax credit on Form 941, the Employee Retention Credit will be reduced by the amount of the R&D Credit already taken (no double dipping).


In Summary

Apply for the Employer Tax Deferral, no matter what.

Next, credits are better, so determine if you’re eligible for any R&D or Employee Retention Credits, and then reconcile the credits to ensure only the balance is deferred (again, no double dipping).

Have questions or need some help? Don’t hesitate to reach out to our experts. For more information on keeping your business running during disruption, visit our COVID-19 Resource Center.

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