Employer Tax Implications of Recent COVID-19 Legislation
The following summarizes the relevant Employer Tax Implications for the first quarter 2020.
- Employers Should File Form 941 by April 30, 2020. Employers will be penalized if they fail to file as none of the COVID-19 Acts specifically relieve taxpayers of their normal payroll-filing obligations.
- Delay of Payment of Employer Payroll Tax. While employers need file form 941, the Act seeks to alleviate the burden on employers struggling to make payroll payments. Taxpayers will not be penalized in 2020 if they have payroll-related balance due payments related to the CARES Act amount. The normal deposit penalties are deferred and would be imposed if this 2020 payroll tax is not paid by December 31, 2021 (50%) or by December 31, 2022 (the remaining 50%).
- Refundable Payroll Tax Credits for Employers. The Acts impose new obligations on employers to help workers affected by the coronavirus, but seek to offset the associated burden by creating refundable payroll tax credits.
- Compliance Mechanics Not Provided. The Acts do not explain the mechanics of this COVID-19 compliance. We will update once Treasury provides additional guidance in terms of forms and instructions.
As of March 28, 2020, three Acts have been enacted to address the COVID-19 pandemic. The following summarizes the relevant Employer Tax Implications.
- The Coronavirus Preparedness and Response Supplemental Appropriations Act (HR 6074), enacted on March 6, 2020, provided $8.3 billion in additional spending on vaccine research and development. Payroll tax was not impacted.
- The Families First Coronavirus Response Act (HR 6201)(FFCRA), enacted on March 18, 2020, provided $104 billion in new spending. Payroll tax was addressed with Refundable Payroll Tax Credits for Employers. The law requires paid sick leave and expanded family and medical leave for workers affected by the coronavirus and created refundable credits for eligible employers. To take immediate advantage of the paid leave credits and to ease employers’ cash flow, the IRS provides eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS. Tax credits for qualified sick leave wages and qualified family leave wages will apply to wages paid for the period beginning April 1, 2020 (see Notice 2020-21), and ending Dec. 31, 2020.
While the FFCRA did not explain the mechanics of how this will work (instructing Treasury to provide guidance as necessary), the IRS did provide the following examples of how the retention of payroll taxes will work:
- If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
- If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748, enacted on March 27, 2020, provided a $2 trillion aid package. Payroll tax was addressed in three separate provisions.
- Payroll Tax Credit Refunds: The CARES Act provides for advance refunding of the payroll tax credits enacted the prior week in the Families First Coronavirus Response Act, P.L. 116-127. The credit for required paid sick leave and the credit for required paid family leave can be refunded in advance using forms and instructions Treasury/the IRS will provide (but this guidance has not yet been issued). The IRS is instructed to waive any penalties for failure to deposit payroll taxes under Section 3111(a) or 3221(a) if the failure was due to an anticipated payroll tax credit.
- Employee Retention Credit: The CARES Act creates an employee retention credit for employers that shut down because of the coronavirus pandemic. Eligible employers are allowed a credit against the employer’s 6.2% share of social security payroll taxes equal to 50% of qualified wages (up to $10,000 in wages) for each employee. Eligible employers are employers who were carrying on a trade or business during 2020 and for which the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak. Employers that have gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. For employers with 100 or fewer employees, all wages paid qualify for the credit. Some exclusions apply (e.g., if an employer takes out a payroll protection loan under Section 7(a) of the Small Business Act during the “covered period,” which runs from February 15, 2020 through June 30, 2020).
- Delay of Payment of Employer Payroll Tax and Self-Employment Tax: The CARES Act seeks to alleviate the burden on employers struggling to make payroll by allowing the employer’s share of the 6.2% Social Security tax that would otherwise be due from the date of enactment (i.e., March 27, 2020) through December 31, 2020, to be paid on December 31, 2021 (50%); the other 50% will be due Dec. 31, 2022. For self-employment taxes, 50% will not be due until those same dates. This law does not waive, just delays, the payment. Importantly, the law does not delay when payroll taxes need to be filed. In contrast, and for comparison, the Act specifically addresses income tax compliance (i.e., form 1040) and specifically moves both the filing and payment date to July 15, 2020.
Taken together, this means an employer that incurs its 6.2% share of Social Security tax in 2020 may 1) defer payment of that tax until December 31, 2021 (50%) and December 31, 2022 (50%), but 2) receives an immediate credit against those yet-to-be paid payroll taxes via the sum of a) the emergency medical leave credit (from FFCRA), b) sick leave credit (from FFCRA), and c) new employee retention credit (from CARES Act). Currently, Taxpayers cannot determine the CARES Act as it depends on retaining employees during this crisis.
For updates and more information about these Acts please visit the following links:
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, H.R. 748
The Families First Coronavirus Response Act (HR 6201)(FFCRA)
The Coronavirus Preparedness and Response Supplemental Appropriations Act (HR 6074)