Tax Strategy: Figuring out payroll taxes in 2020
The favorite tax tool being used by Congress for helping businesses through the coronavirus crisis is the payroll tax, not the income tax. While individuals are receiving advances on their new income tax credit, businesses are receiving advances on a variety of new payroll tax credits.
Sorting through that variety and the choices for advances will present a challenge for 2020, but the result will hopefully mean quicker and broader tax relief than an income tax credit might have afforded.
Credits for sick, family leave
The Families First Coronavirus Response Act not only mandated that employers with fewer than 500 employees offer paid sick leave and family leave, it provided offsetting refundable payroll tax credits to reimburse employers for the cost. Employers with fewer than 50 employees may be able to request a waiver.
The credits apply for payroll for the period from April 1 to Dec. 31, 2020. The self-employed are eligible for the credits. Health insurance costs during the leave period may also be included in calculating the credits.
The paid sick leave credit comes in two forms. If an employee takes emergency paid sick leave due to government quarantine, recommended self-quarantine, or showing symptoms, the tax credit is equal to 100 percent of regular pay up to $511 per day for a maximum of 10 days, or $5,110. If an employee takes emergency sick leave to care for an individual subject to government quarantine or recommended self-quarantine, or to care for a child whose school or place of care is closed due to coronavirus, the tax credit is equal to two-thirds of the employee’s regular pay up to $200 per day for a maximum of 10 days, or $2,000.
The paid family leave credit applies if the employee takes emergency or family leave and is unable to work to care for a child whose school or place of care is closed. The tax credit is equal to two-thirds of the employee’s regular pay up to $200 per day for a maximum period of 10 additional weeks, or $10,000. An employer could get a tax credit for both paid sick leave and paid family leave for the same employee.
Employee retention credit
The CARES Act creates a 50 percent refundable employee retention credit for quarterly wages paid up to a maximum of $10,000 of wages for the period March 13 to Dec. 31, 2020. It is limited to offsetting the employer’s share of Social Security taxes, not Medicare taxes, and does not include any wages associated with claimed paid sick leave and paid family leave credits. Health insurance costs may be taken into account in determining the wages eligible for the credit.
An eligible employer is an employer whose business was fully or partially suspended by a government order or whose quarterly gross receipts were less than 50 percent of the gross receipts for the corresponding quarter in 2019. An employer is no longer eligible in a quarter following a quarter in which the gross receipts are greater than 80 percent of the gross receipts in the corresponding quarter in 2019.
Tax-exempt organizations may be eligible employers, but government employers and the self-employed do not qualify for the employee retention credit. Also, any employer who receives a Small Business Administration loan under the Paycheck Protection Program in the CARES Act is not eligible. An eligible employer can elect out of receiving the credit.
For employers with greater than 100 employees, qualified wages include wages only of furloughed employees. For employers with 100 or fewer employees, qualified wages include all employees during the period of shutdown or decline in gross receipts. The wages of the employee cannot exceed the wages paid in the prior 30-day period.
Delay of employment taxes
The CARES Act also provides that all employers may defer payment of up to 50 percent of the employer’s portion of Social Security taxes through Dec. 31, 2020. Fifty percent of the deferred taxes must be paid by Dec. 31, 2021, and the balance repaid by Dec. 31, 2022. The deferred payment provision is not available to an employer who had an SBA loan under the PPP forgiven. Under a separate provision of the CARES Act, an exclusion is provided for the amount of the forgiven PPP loan.
New IRS Form 7200 (available only in draft form as of this writing), “Advance Payment of Employer Credits Due to COVID-19,” permits an employer to seek an advance of the refundable leave credits and retention credit to the extent that those credits exceed the required employment tax deposit for the period. An employer may choose to file Form 7200 or not and may file the form as many times as warranted.
When the Form 941 is filed at the end of the quarter, it must include a reconciliation of the advances under Form 7200. Self-employed individuals are not eligible for advances of the leave credits.
Documentation to support the reconciliation includes the calculation of the leave credits and retention credits, calculation of qualified health plan expenses, documenting employee eligibility for the leave credits, and documenting employer eligibility for the retention credit. The list of documentation requirements highlights the tasks faced by employers in claiming these credits.
IRS Notice 2020-22 provides a waiver of the penalty for failure to pay employment taxes for which there is an offsetting credit available. This applies to both the leave credits and the retention credit. Waiver is not available if the employer obtained advances through Form 7200.
The credits for paid sick leave and paid family leave only apply to employers with fewer than 500 employees. The employee retention credit applies to all employers, but the calculation is different depending upon whether the employer has more than 100 employees or not. It is possible for an employer to qualify for both credits for different wages paid at different times during the year.
Employers also have the choice of not paying the employment taxes otherwise due on a quarterly basis that will ultimately be eligible for the credits on the 2020 tax return or more aggressively seeking an advance of the credits by filing one or more Form 7200s. Additional guidance is expected from the IRS during the course of 2020 on details concerning the credits and Form 7200.