Payroll Tax and Small Business Relief During Covid-19 Pandemic
With the status of rules and legislation by the federal government changing with regard to the Covid-19 pandemic, we wanted to let you know where things stand for small businesses and the implications for small businesses, government benefits, and payroll taxes. Small businesses can usually take advantage of a variety of payroll tax relief options offered by the IRS and the federal government. With Covid-19 thrown into the mix, there are some new federal tax relief changes that to take note of for the 2020 tax year and payroll tax filings in particular for both the employer and employee.
These new changes are only temporary and stem from the Coronavirus Aid Relief and Economic Security, or known as the CARES Act, and the Families First Coronavirus Response or FFCRA, which collectively were aimed to help individuals and small businesses handle payroll and the associated payroll tax during the pandemic. With a combination of these relief options, these laws are put in place to assist businesses and employers survive amidst the negative economic impacts that were caused by the coronavirus pandemic.
Here is some important information regarding the types of relief that are available in 2020 and 2021, to employers with regard to government benefits, PPP loans, income taxes, payroll tax issues, and the like.
Payroll Tax Deferral
Thanks to the CARES Act, most small businesses can take advantage of the payroll tax relief by deferring the social security portion of their payroll tax withholding that they would otherwise have to submit to the government between March 27, 2020 and December 31, 2020.
For clarity, the federal payroll taxes and tax withholding remitted by the employer are calculated as follows: the current tax rate for social security tax is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare tax is 1.45% for the employer and 1.45% for the employee, or 2.9% total.
If this option is chosen, keep in mind that employers are still required to take out the employees’ portion of Social Security taxes, which is a portion of the total payroll tax, and remit them; however, they are able to defer the 6.2% of the payroll taxes that the employers would have had to otherwise pay.
Employers will need to pay their deferred Social Security tax in installments by paying 50% of the total amount owed on or before December 31, 2021. The remainder of the social security tax withheld from payroll taxes must be paid in installments due on December 31, 2022. Under this CARES Act, large and small businesses get quite a bit of flexibility when it comes to payments with regard to the withheld payroll taxes.
Businesses will not be required to take a special election to defer deposits and payments. What happens instead - the changes will be shown on IRS Form 941 - that form is used as the employer’s quarterly payroll tax return.
Keep in mind to clear up some confusion regarding social security taxes and payroll taxes
Previously, there was an option to defer the employer’s portion of Social Security taxes, and it was available to most employers who received a loan through the Paycheck Protection Program (PPP), and they were only allowed to defer their payments until they were notified that their loans had been forgiven.
This has changed -- Thankfully, now -- as of June 2020 due to the PPP Flexibility Act -- Employers can now defer payments of their share of Social Security taxes even after PPP loan forgiveness.
Note: This deferral only applies to Social Security taxes. Keep in mind that employers still need to continue paying their portion of Medicare taxes and can’t defer them.
Employee Retention Tax Credit
With the CARES Act, employers and small businesses also can get a credit for keeping employees on the payroll. However, this is only for businesses directly impacted by covid and the pandemic with regards to payroll taxes and not the owners federal income tax. With this tax credit, it is put in place to assist employers to keep their employees on the payroll. This credit is available to the majority of employers and small businesses. This credit is equal to one-half of the qualified wages up to $10,000 per employee, which was paid around March 12, 2020 and through December 21, 2020. This is calculated by reviewing the company's payroll during the said period, which includes the associated payroll taxes.
Who is Eligible to Receive the Employee Retention Tax Credit?
Employers who are eligible for this employee retention credit are those who have had operations be partially or completely shut down due to either government orders or the pandemic. Additionally, employers that have experienced a decline of 50% minimum of their gross revenue during a relevant quarter, in comparison to the same quarter the following year could also qualify.
With the federal governmental order - it has to be a closure mandate and not a closure recommendation. For example, let’s say your restaurant was ordered to close in an attempt to slow down the pandemic, you may qualify. However, a store that chose to close on their own due to a recommendation may not qualify for this credit. If a business can show that it has noticed a 50% drop or more in revenue, it may also qualify.
Employers who are considered governmental employers absolutely cannot claim this credit. Individuals who are self-employed can claim this credit for wages they have paid their employees, but not for wages they paid to themselves. All PPP recipients are eligible to defer their payments, thanks to the PPP Flexibility Act.
How to Claim the Employee Retention Act Credit
Businesses are able to claim the employee retention credit right away by keeping payroll tax funds in an equivalent amount for their quarterly 941 tax deposit amounts.
Employers should submit Form 7200 to the IRS if the retained payroll taxes won’t cover the entire credit to receive advance payments.
Small Business Administration Interruption Loan Credit
The majority of businesses that have fewer than 500 employees are typically able to apply for paid leave tax credits with the FFCRA for a Small Business Administration (SBA) interruption Loan Credit. These large and small businesses would also need to meet the law’s requirements to provide the leave.
Additionally, small businesses that have fewer than 50 employees can be exempt from the FFCRA’s childcare requirements. This exemption only applies if the business can show that the childcare expense would disrupt the business’ viability.
Required Paid Leave Credits Businesses
Businesses that have employees who are placed in quarantine, have symptoms, or receive a covid-19 diagnosis are eligible to receive a 100% paid leave credit for each employee who needs to take paid sick leave. The business will need to pay their employee their regular wages for up to 80 hours with paid sick leave. This expense will be reimbursed to the employer from the tax credit, which includes up to $511 reimbursement each day of the required sick leave.
If a business has an employee who has to take sick leave to care for their family member concerning the pandemic, including a child who attends a school that is closed, or even a family member placed in quarantine, the credit will send reimbursement to the employer in the amount of two-thirds of the employee’s original wages, which is set to a max of $200 per day. This credit is good for up to 10 days.
Employers can also claim an additional credit for child care, which includes a reimbursement rate of 66.6% of the employee’s normal rate for up to 10 weeks, following specific circumstances. This specific credit can be claimed for a maximum of $200 each day.
How to claim paid leave credits for Employers
Businesses who are mandated by the FFCRA to provide each employee with paid leave due to COVID-19 is eligible to subtract any funds they paid for paid leave from their deposit of payroll taxes, including the employer’s and employee’s share of Social Security, Medicare taxes, along with the federal income taxes.
Note: Businesses have the right to ask for accelerated refunds, but only if the payroll taxes that they would have otherwise paid are not enough to cover the cost of the needed paid leave.
These changes are temporary and are effective now through December 31, 2020. Companies will benefit from being able to claim this refundable payroll tax credit. Additionally, businesses can benefit by deferring payments of their payroll taxes. Tax relief options can help businesses to continue operating as normal as possible despite the pandemic, and to have a better chance to survive.