What the CARES Act has for you and your business...
Preface
COVID 19 has proven to be a cataclysmic event that has thrown the world into a tizzy. With over 20 million infected worldwide and over 300 thousand deaths here in the USA alone, this novel virus has proven to be one of the worst global events, in recent times. The financial implications are astounding when you consider millions of people have lost their jobs and many small businesses closing their doors in places like my hometown of Jamaica, NY. But, Congress provided over $2 trillion in relief to help many individuals and dying businesses via sweeping legislation called the Coronavirus Aid, Relief and Economic Security Act (or the "CARES Act” as it is commonly known) and Families First Coronavirus Response Act (or FFCRA). Today, I will highlight certain provisions (as they relate to businesses) of the Act that will add clarity to or, if nothing else, encourage you to ask your professional about the varied tax implications.
IRS Payroll Tax Relief for Small Businesses Impacted by Coronavirus
Small businesses can benefit from various types of federal payroll tax relief through 2020. The changes include a deferral of payroll taxes and several refundable payroll tax credits. These changes are temporary but, taken together, the laws help employers and businesses survive these terrible economic conditions.
Deferred payroll taxes
Under the Act, employers can claim payroll tax relief by deferring payment of their part of Social Security contributions, which they should have submitted to the IRS between 27 March 2020 and 31 December 2020. Employers must continue deducting and transferring employees' tax contributions. But, these business owners can delay the 6.2% they would otherwise be required to pay. By paying 50% of the total amount starting December 2021 and then what is left by 31 December 2022, small business owners can delay their current social security contributions.
Changes may be reflected in the employer's quarterly payroll tax return, Form 941, and company owners are not obligated to take a special election to defer their payments.
While most of Jamaica, NY, employers has the option of deferring the employer's share of social security contributions, those who received a loan through the Paycheck Protection Program were initially only allowed to defer their payments until their loan forgiveness date. But, now can defer paying their share of social security contributions even after the PPP loans have been forgiven. This correction was made by the PPP Flexibility Act of June 2020.
Note this deferral applies only to Social Security taxes. Employers cannot postpone their share of Medicare taxes.
Employee retention credit (or ERC)
For pandemic-affected companies, the CARES Act also provides a tax credit but only when employees are kept working. This credit is designed to help workers on the job and is available to most employers. The equivalent of 50% of the qualifying wages of up to $10,000 for employees paid in the last three quarters of 2020 is allowed as a credit.
Criteria for eligibility: Employee Retention Credit (ERC)
To be considered qualified employers, the business operations must have been partially or completely discontinued due to government orders mandating a shut-down. Alternatively, employers who experience a decline in the gross income of more than 49.99% in a relevant quarter compared to the same quarter of the previous year may qualify too.
Government regulation cannot only suggest that businesses close operation, but there must be a mandatory shut-down. An eatery that needs to close to stop the pandemic, for example, may qualify, but a pharmacy that closed due to a recommendation may not be eligible for the ERC.
Self-employed people that paid themselves wages cannot take the credit but can count the wages they have paid their employees. The PPP Flexibility Act also allows borrowers to defer their payments.
How businesses claim the credit for employee retention
Business owners in places like Jamaica, N.Y. can immediately claim the employee retention credit for their employees by withholding payroll tax credits equal to the total of their quarterly payments. Employers can file Form 7200 if the withheld payroll taxes do not cover the entire credit to receive advance payments.
How do Small Business Administration Interruption loans affect the ERC?
Since the SBA interruption loan is intended as an alternative to the credit program, companies that have received from SBA are not eligible for the employee retention credit. Employers can only claim the retention credit if they never got an interruption loan from the SBA.
What about the paid leave tax credit?
Under the FFCRA, most small and medium-sized enterprises are obliged to offer paid leave to their employees when such workers are debilitated due to the pandemic. The bill also includes tax credits for paid leave on a dollar-for-dollar basis.
Eligibility rules for paid leave tax credits
Most Jamaica, NY (and the surrounding areas) companies with fewer than 500 employees are entitled to paid leave tax credits under the FFCRA and are also subject to statutory leave requirements. Companies with fewer than 50 employees can be, however, exempted from FFCRA requirements for childcare. The exemption applies if the company can prove the cost of childcare would jeopardize the company’s viability.
Mandated paid leave credits
Business owners whose employees are ill or have been diagnosed with COVID-19 can receive 100% credits for each employee who takes paid sick leave. The tax credit reimburses the cost up to $511 per day of required paid sick leave. The company must pay the employee his regular wage for up to 80 hours through paid sick leave.
If an employee is forced to take leave due to pandemic-related circumstances to care for a family member, (including caring for a child whose school is closed or a family member quarantined) and the employer pays wages then 33% of the regular wage will be reimbursed to the employer up to $200 per day for up to 10 days.
Under certain circumstances, employers may also claim an additional child care credit at a reimbursement rate of 66.6% of the employee's regular rate for up to 10 weeks. The credit is available for up to $200 per day.
Getting the paid leave credits
Companies that are required by COVID-19 by the FFCRA to offer paid leave to an employee may deduct the money they paid for paid leave from their contributions to payroll taxes which would include the employee and employer share of Medicare and Social Security taxes, as well as the federal income tax that would have been paid. Companies can request an accelerated refund if the payroll taxes they pay are insufficient to cover the cost of paid sick leave.
These temporary changes will be effective until 31 December 2020. Companies can benefit from applying for the refundable payroll tax credits and the deferral of their payroll tax payments. Tax relief can really help these businesses stay viable during the pandemic.
In conclusion
The government should stand up for its constituents. And, it is remarkable that our elected officials have passed these laws to help small businesses like me here in Jamaica, N.Y. so that we have a fighting chance. The stimulus packages associated with the CARES Act have had positive results, but taxpayers need to know how these programs work, so talk to your tax expert to ensure you are on the right track.
IMPORTANT: Our firm specializes in tax resolution. We serve clients virtually so don't hesitate to reach out. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to our firm so we can schedule a confidential consultation to explain options to permanently resolve your tax problem. Make an appointment here! Or, call Toll-free 1-855-254-1892.