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Payroll Tax and Other CARES Changes: Part Two

Author: Jamison Walters

Contributing Editor: Blaire Farine

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was fully enacted on March 27, 2020. The CARES Act provides $2 trillion of economic relief. This update to our previous article is focused specifically on the CARES Act's provisions related to taxation of employee benefits, compensation, and wages.

Employee Retention Credit

For businesses forced to close or experience a significant economic decrease during the pandemic, CARES Act Section 2301 creates a new employee retention credit (the Retention Credit) for wages paid from March 13, 2020 to December 31, 2020. Eligible employers are allowed a credit against employment taxes equal to 50% of qualified wages, up to $10,000 for each employee (i.e. $5000 maximum per employee).

The Retention Credit applies to:

  • The employer's share of Social Security tax under IRC Section 3111(a) (6.2% of wages)
  • The portion of the employer's and employee representative's share of RRTA tax under IRC Sections 3211(a) and 3221(a) that corresponds to the 6.2% Social Security tax rate

Under Section 2301(b)(3), if the Retention Credit exceeds the employer's Social Security or RRTA tax liability for the quarter, the excess will be treated as an “overpayment” that shall be refunded to the employer. This refund owed to the employer as a “customer" even if it utilizes services of a certified professional employer organization.

An eligible employer is an employer that was doing business in 2020 and either, 1) operation of the business was fully or partially suspended during a calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, group meetings due to COVID-19 (i.e. stay-at-home orders issued by county or state authorities), or 2) experienced significant decline in gross receipts beginning first quarter 2020 (defined as less than 50% of gross receipts for the same calendar quarter of 2019); “significant decline” ends when the gross receipts of a corresponding quarter from the previous year exceed 80%.

In other words, shutting down partially or fully qualifies a business under this provision. Alternatively, ff the business did not shut down entirely or partially, the Retention Credit Program is also accessible from the time that a business experienced at least a 50.01% decline in gross receipts compared to the previous year’s corresponding quarter, until the gross receipts of a subsequent quarter increase to being only a 20% decline compared to its previous year’s corresponding quarter.

Tax exempt organizations under 501(c) of the Internal Revenue Code may also receive relief under the Retention Credit Program within the same parameters described here.

Governmental employers and any employer that receives a Paycheck Protection Program loan are not eligible for the Retention Credit (2301(j)).

Qualified Wages Under the Employee Retention Credit

For employers of more than 100 employees, qualified wages are wages paid for services to an employee that is not working because of a COVID-19 Shutdown or Gross Receipts Decline (as defined above). (2301(c)(3)(A)(i).

For employers of 100 or fewer employees, qualified wages are wages for services to an employee during a COVID-19 Shutdown or during a calendar quarter of Gross Receipts Decline, regardless of whether the employee is providing services or not. (2301(c)(3)(A)(ii).

Essentially, wages that qualify are:

  • 100+ Full-Time Employees: wages paid to employees being paid but not providing services due to full or partial shutdown or gross receipt reduction; and
  • Less than 100 full-time employees: wages paid all employees whether providing services or not

The limitation for wages paid for such employees are limited to the amount the employee would have been paid for an equivalent amount of work in the 30 days immediately preceding the period for which the employee is paid. (2301(c)(3)(B)).

In determining how many employees are employed, the average number of full-time employees during 2019, as determined under IRC Section 4980H, applies.

In either case, under 2301(c)(3)(C), qualified wages include qualified health plan expenses paid or incurred by the eligible employer for health coverage to the extent excludable from gross income of the employees under IRC Section 106(a). These expenses are allocated to qualified wages as allowed by the Treasury Secretary. Unless otherwise provided by the Secretary, the allocation shall be treated as properly made if it is on a pro rata basis among employees and periods of coverage (during the COVID-19 emergency period).

This section has a “Denial of Double Benefit” provision to prevent “double dipping.” Any wages taken into account determining the credit allowed for the Employee Retention Program cannot be taken into account for:

  • Wages taken into account under IRC Section 45S (income tax credit for paid family and medical leave);
  • Wages taken into account under sections 7001 and 7003 of the Families First Coronavirus Act (provides payroll tax credits for paid leave required to be provided by small employers);
  • Wages paid to ineligible individuals specified in IRC Section 51(i)(1) (e.g. dependents who are employees, individuals who own 50% or more of company stock), fiduciaries, etc.);
  • Wages paid to an employee in which the employer is allowed, and claims, a Work Opportunity Credit under IRC Section 51

Payroll Tax Deferral

Section 2302 delays required federal tax deposits for certain employer payroll taxes and self-employment taxes incurred between March 27, 2020 (enactment date) and December 31, 2020. Amounts will be considered timely paid if 50% of the deferred amount is paid by December 31, 2021, and the remainder by December 31, 2022. This is not a waiver, but a deferral.

Employment taxes covered under this provision include:

  • Internal Revenue Code Section 3111(a): employer's share of Old-Age, Survivors, and Disability Insurance Tax (Social Security), currently set to 6.2% of wages up to the wage base ($137,700 in 2020)
  • The employer's and employee representative's share of Tier 1 Railroad Retirement Tax Act (RRTA) tax under Internal Revenue Code Sections 3211(a) and 3221(a) (only for railroad employers, and the 6.2% portion that coincides with the Social Security Tax due)
  • Self-employed individuals: the equivalent amount of Self-Employment Contributions Act (SECA) tax due on net earnings from self-employment under IRC Section 1401(a) (50% of the 12.4% tax)

Deferral may be used by employers that remit payroll taxes via an agent under section 3504 of the Internal Revenue Code or certified professional employer organization. Where an employer directs a third party to defer the applicable tax payments, employers are solely liable for making timely deposits under the deadlines set through the CARES Act, including those related to worksite employees performing services for a certified professional employer organization customer during the covered period.

It is important to note that not all payroll taxes are covered by this provision, including, federal income tax withholding, Medicare tax, or employees’ share of Social Security Tax. Additionally, there is no dollar cap on the wages that are counted in calculating the taxes that may be deferred. As previously noted, employers that take advantage of the Small Business Act loan through the Paycheck Protection Program enacted by the CARES Act preclude usage of the Payroll Tax Deferral program if the loans are later forgiven (“[Section 2302] shall not apply to any taxpayer if such taxpayer has had indebtedness forgiven under [the Paycheck Protection Program]”).

Summary and Analysis

Both employers and self-employed individuals may look into whether they qualify for the payroll tax deferral program. No interest is charged for deferring, but as stated above, this is not a waiver of amounts that will be eventually owed.

A business must meet the qualifications outlined to be eligible and will certainly be subject to reporting and analysis by the relevant authority in charge of approving these deferral requests. Most regions will have been subject to a version of a “stay-at-home” order, but it will be unclear as to which businesses will ultimately be affected. Restaurants and bars are a very clear example. However, other businesses might be deemed “essential” or even see an increase in gross receipts during this time. Other businesses still may easily adapt or were already set up for employees to work remotely and see little to no change. However, it is obvious that many businesses will be affected by COVID-19 related interruption. Where a business has employees working remote, the Gross Receipts Decline test will be used to determine whether the business qualifies. Smaller operations with limited locations will be able to detect the impact more easily than a larger business with offices and locations in multiple regions that must be treated as a single employer under this law (Aggregation Rule – Section 2301(d)).

By combining the retention credit with the payroll tax deferral, the CARES Act allows employers to reduce 2020’s Social Security tax and defer the remaining balance due to 2021 and 2022. The IRS is under instruction to, and will, publish further guidance as quickly as possible.

Employers must decide on which relief program they qualify for and wish to use because use of the Paycheck Protection Program disqualifies the use of the both the Payroll Deferral and Employee Retention Programs.

Naturally, the experienced attorneys here at Kearney, McWilliams, and Davis are here to assist in making these decisions.