Employer Credit for Salary Continuation 4-1-20

Employer Credit for Salary ContinuationBy now you may have heard about the employer paid compensation benefits available to our employees. It makes great headlines and offers hope to our employees of retaining their jobs, but how does the government expect a small business to take on this responsibility?  It is through employee retention payroll tax credits for employers, effective April 1, 2020. There are two provisions on the books, leave pay and continuation wages to all of your staff, so you need to determine which applied to your business. Perhaps both will apply in your case.First, let’s consider the recovery of costs from either of the two major provisions of the Families First Coronavirus Response Act: the Emergency Paid Sick Leave Act or the Emergency Family and Medical Leave Expansion Act. Our recent Tax Update newsletter explained what type of leave pay applied to which wages paid. For these benefits paid, an eligible employer who pays qualifying sick or child care leave is entitled to a credit equal to 100% of the direct cost of paying that leave against their payroll tax liability, rather than depositing the funds with the IRS.Payroll taxes available for retention include withheld federal income taxes, and both the employee and employer share of Social Security and Medicare taxes with respect to all employees. Generally that is any tax deposited to that employer’s quarterly Form 941 tax liability. If the payroll tax liability is insufficient to cover the cost of qualified sick and child care leave paid, employers can request an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure were not announced as of this writing.Second, in the CARES Act just enacted, as in the leave payroll tax credits available, we necessarily had little warning of this major change. Eligible employers can qualify for a refundable credit against payroll taxes due generally, but here only from the employer's 6.2% portion of the Social Security (OASDI) payroll tax (or Railroad Retirement tax) for 50% of certain wages (below) paid to employees during the COVID-19 crisis. Note that this is only the EMPLOYER’s Social Security taxes due.The credit is available to employers carrying on business during 2020, including non-profits (but not government entities), whose operations for a calendar quarter have been fully or partially suspended as a result of a government order limiting commerce, travel or group meetings. The credit is also available to employers who have experienced a more than 50% reduction in quarterly receipts, measured on a year-over-year basis relative to the corresponding 2019 quarter, with the eligible quarters continuing until the quarter after there is a quarter in which receipts are greater than 80% of the receipts for the corresponding 2019 quarter. We didn’t say this would be easy, but there necessarily needs to be some accountability. We don’t know how this will be reported yet.For employers with more than 100 employees in 2019, the eligible wages are for employees who aren't providing services because of the business suspension or reduction in gross receipts described above.For employers with 100 or fewer full-time employees in 2019, all employee wages are eligible, even if employees haven't been prevented from providing services. The 50% credit is provided for wages and compensation, including health benefits, and is provided for the first $10,000 in eligible wages and compensation paid by the employer to an employee. Thus, the credit is a maximum $5,000 per employee.Wages don't include (1) wages taken into account for purposes of the payroll credits provided by the earlier Families First Coronavirus Response Act for required paid sick leave or required paid family leave, (2) wages taken into account for the employer income tax credit for paid family and medical leave (under Code Sec. 45S ) or (3) wages in a period in which an employer is allowed an employee a work opportunity credit (under Code Sec. 51 ). An employer can elect to not have the credit apply on a quarter-by-quarter basis.Because this is complex, the IRS has the authority to advance payments to eligible employers and to waive penalties for employers who do not deposit applicable payroll taxes in reasonable anticipation of receiving the credit. The credit is not available to employers receiving Small Business Interruption Loans. The credit is provided for wages paid after March 12, 2020 through December 31, 2020.Delayed payment of employer payroll taxes. Taxpayers (including those self-employed) will be able to defer paying the employer portion of certain payroll taxes through the end of 2020, with all 2020 deferred amounts due in two equal installments, one at the end of 2021, the other at the end of 2022. Taxes that can be deferred only include the 6.2% employer portion of the Social Security (OASDI) payroll tax and the employer and employee representative portion of Railroad Retirement taxes (that are attributable to the employer 6.2% Social Security (OASDI) rate). This relief isn't available if the taxpayer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act (see below). For the self-employed, the deferral applies to 50% of the Self-Employment Contributions Act tax liability (including any related estimated tax liability). Note: If you receive a credit from the wages paid in the section above, there will not be any eligible tax to defer. So you have a choice to make between the two provisions.Your payroll processing vendor should be all over this new way of doing business and likely ready to handle the details of running your paychecks and modifying your payroll tax deposits accordingly. You may want to consider running a split payroll cycle for your next pay date if yours bridges over April 1, to keep the ineligible payroll separate from that which is starting that day. Obviously there will be some changes in the Form 941 for the second quarter going forward, but there is time to get that figured out before July. If you plan to take advantage of either provision noted here, we recommend that you engage a payroll processing service to assist you. There are too many chances for errors!