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Payroll Tax and Other Changes in the CARES Act

Authors: Jamison Walters and Blaire Farine

Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion bill to support American businesses was enacted by President Trump on March 27, 2020. The CARES Act provides for deferrals of employer payroll tax and an employee retention tax credit. This version of the bill was updated to apply to any employers of any size impacted by COVID-19 circumstances. The CARES Act creates a refundable payroll tax credit for employers for half of wages paid to employees during the COVID-19 shut-down.

Payroll Tax Credits

Under the CARES Act, eligible employers can defer their portion of Social Security tax due to the IRS over the next two years. To be considered timely, 50% of the deferred tax must be paid by December 31, 2020, and the remaining balance must be paid by December 31, 2022.

The CARES Act also gives a refundable tax credit to employers equal to half of qualified wages paid to employees during a calendar quarter. This credit may be up to $5,000, representing 50% of the first $10,000 of compensation per employee based on qualified wages. The credit includes health benefits but excludes amounts the employer has already received a tax credit for under the Families First Coronavirus Response Act. The tax credit is applied against the employer’s Social Security payroll tax obligations, and excess credit is refundable to the employer.

Eligible employers are those that conducted a trade or business in the year 2020 and were required by the government to partially or fully suspend or shut-down their trade or business OR experienced a considerable decline in gross receipts due to COVID-19. “Considerable Decline” means that gross receipts have declined more than half when compared to the corresponding quarter in the previous year (e.g. Q2 2020 will be compared to Q2 2019—if Q2 2020 earnings are $49,999 compared to Q2 2019 earnings of $100,000, that business will be considered to have experienced considerable decline). These wages continue to be qualified wages until the time that the businesses’ earnings rise to be at least 80% of the previous year’s corresponding quarter (e.g. Q4 2020’s $80,000 earnings compared to Q4 2019’s $100,000 earnings means that the business is no longer experiencing considerable decline).

Depending on the size of the employer, qualified wages eligible for the credit is defined in two ways. The first is if an eligible employer had an average 100 or less full-time employees in the year 2019, the wages that qualify for the credit are those in the period in which the employer remains an eligible employer, meaning all employee wages qualify for the credit. Second, if the employer had an average of 100 or more full-time employees in the year 2019, the wages that qualify are those paid to employees during the applicable period in which they are not able to provide services due to COVID-19.

The tax credit does not apply to companies that receives debt forgiveness on a SBA loan authorized through the CARES Act.

Payroll Tax Deferral

CARES Act delays payment of an employer’s portion of Social Security payroll taxes from wages paid in 2020 over two years, 2021 and 2022. Employers and self-employed individuals may defer the Social Security portion of payroll tax beginning on 3/27/2020, when the CARE Act was enacted. The deferment delays the employer’s portion of Social Security payroll taxes due in 2020 to half due on December 31, 2021 and the remaining half due on December 31, 2022.

The tax deferral does not apply to companies that receive a covered loan under other provisions of the CARES Act relating to loans authorized by the Small Business Act.

New Entity Tax Deadlines

LLCs, corporations, and sole proprietors that end their year on December 31 normally have a business tax return deadline of April 15. The deferment extends this deadline for businesses impacted by COVID-19 circumstances for 90 days without penalties to July 15. Corporations also have an estimated tax payment deferment until October 15.