April 7, 2020
Coronavirus Employer Credits Primer
Employer credits are at the top of the minds of small business owners. These owners are looking forward to returning to full capacity once the crisis is over. There are now volumes of information in the new laws to respond to the economic fallout of the Coronavirus Pandemic. We have provided guidelines to help businesses properly understand which credits are applicable, to whom, and at which time.
The most significant discovery is the same wages cannot qualify for multiple credits.
Families First Coronavirus Response Act
The Family First Relief Act is an expansion of the Family Medical Leave Act (FMLA). This law is effective April 1, 2020, through December 31, 2020. Businesses employing fewer than 500 employees are now required to compensate employees during the 12-week FMLA. Through the company’s paid sick leave provision, employees receive 100% of their wages for the first 2 weeks of leave. Wages for the remaining 10 weeks will be 100% of the employee’s normal compensation. The employee receives 2/3 of their normal compensation for the remaining 10 weeks if caring for a child whose school or place of care is closed. Until the end of 2020, employers with fewer than 500 employees must offer paid sick leave to those who meet the criteria associated with the public health emergency.
Emergency Paid Sick Leave Act (EPSLA)
EPSLA requires that employers provide up to 80 hours of paid sick leave to employees who need to take leave from work for certain specified reasons related to COVID-19.
The qualifying reasons are:
- The employee or someone the employee is caring for is subject to a government quarantine order or has been advised by a health care provider to self-quarantine.
- The employee is experiencing COVID-19 symptoms and is seeking medical attention The employee is caring for his or her son or daughter due to the closure of the childcare facility during the COVID-19 crisis.
- Health Care employers, such as home care companies, may prohibit any of their employees from taking “public health emergency leave” and “paid sick time” pursuant to the FFCRA.
Payroll Tax Credits Related to Paid Sick Leave and FMLA
Each quarter, companies are entitled to a fully refundable tax credit for both the paid sick leave and FMLA compensation; apply these credits against the employer’s owed Social Security taxes.
Employers will be allowed the full amount of this refundable credit even if it exceeds their employment tax liability. This credit is for Sick Leave and FMLA payments only and does not cover regularly paid wages. Health insurance premiums paid to cover employees while on leave increases the credit amount and is applied against the Medicare Tax. Taking advantage of this credit supersedes the payroll costs calculated in the Paycheck Protection Program, as any wages paid under the FFCRA are not eligible for the PPP calculation.
Payroll Tax Deferral
Payroll Tax Deferral allows employers to defer the payment of payroll taxes incurred between March 27, 2020, and December 31, 2020. The deferral applies to the employer portion of the social security taxes (6.2% of employer wages up to $137,700) and the employer’s and employee’s share of Tier 1 Railroad Retirement Tax up to the 6.2% of wages that corresponds with the social security tax. A self-employed individual may also defer 6.2% of self -employment taxes incurred during this period. The deferred taxes are due and considered timely paid if 50% of the amount deferred is paid by December 31, 2021, and the remaining 50% deferred amount is paid by December 31, 2022.
CARES Act and Employee Retention Credit for Employers Subject to Closure Due to COVID-19 Crisis
The Employee Retention Credit is available for employers who are subject to closure due to the COVID-19 crisis. As part of the CARES Act, employers may take advantage of a refundable credit for retaining employees while closed due to COVID-19. The credit is equal to 50% of qualified wages paid to employees after March 12, 2020, and before January 1, 2021, with a maximum amount of qualified wages to equal $10,000 per employee. Qualified wages paid between March 13, 2020, and March 31, 2020, may be claimed together with qualified wages paid during the 2nd quarter of 2020 using Form 941.
If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are for the time the employee is not providing services due to either:
(1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or
(2) a significant decline in gross receipts.
For these employers, qualified wages for an employee may not exceed what the employee wages were while working an equivalent duration during the 30 days immediately preceding the period of economic hardship. A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.
If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described above. The gross receipts test does not apply.
Unfortunately, employers who receive a Paycheck Protection Program loan are not eligible for the Employee Retention Credit.
Advance Payment of Employer Credits Due to COVID-19, IRS Form 7200
Advance payment of employer credits is available to businesses with fewer than 500 employees. Eligible employers entitled to claim these refundable tax credits are businesses that are required to provide qualified sick leave wages and qualified family leave wages under FFCRA. The Advanced Credit is also available for employers claiming the Employee Retention credit. Eligible employers also get credit for the qualified health plan expenses allocated to the qualified leave wages and for the employer’s share of Medicare taxes on the qualified leave wages. The credit is available on qualifying leave wages paid between April 1, 2020, and December 31, 2020.
You can submit the Form 7200 for an advance payment of the credits anticipated for a quarter at any time before the end of the month following the quarter in which you paid the qualified wages. If necessary, you can file Form 7200 several times during each quarter.
Example 1: Suppose an eligible employer is usually required to deposit $8,000 in employment taxes. If the employer is entitled to a credit of $5,000 for qualified sick leave wages, certain related health plan expenses, and the employer’s share of Medicare tax on the leave wages, they could reduce its federal employment tax deposits by $5,000. The employer would only deposit the remaining $3,000 on its next regular deposit date.
Example 2: If an employer is entitled to an employee retention credit of $10,000, and an employer usually deposits $8,000 in employment, the employer can retain $8,000 of the taxes and request an advance payment for the remaining $2,000.
Do not file the form to request an advance payment for any anticipated credit for which already reduced your deposits.
It is important to weigh all of your options before deciding which route will be best for your business. Consider leaning on your accountant for cash flow guidance, tax deadlines, completing SBA and CWCA loan applications, Family First tax credit calculations, and interpreting the CARES Act. Our staff is available, and we have the knowledge, skill, and information that you need right now to address your financial needs in a timely fashion adequately.
Jennifer is a Tax Manager for Wilke & Associates CPAs & Business. Jenn is not your everyday tax pro. She is a seasoned accounting and tax professional with direct experience in all areas of the balance sheet, income statement, income tax preparation, and business consulting.