CARES Act: Employee Retention Credit and Employer Social Security Tax Deferral
May 1, 2020
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES) was enacted. This Act includes the Employee Retention Credit and Employer Social Security Tax Deferral (in addition to the small business loans discussed here) for Employers.
Employee Retention Credit
The Employee Retention Credit is designed to encourage businesses to keep employees on the payroll. There are only two exceptions: State and local governments and small businesses who take small business loans per the CARES Act.
The Employee Retention Credit is a fully refundable tax credit for eligible employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) paid to employees. This credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Eligible employers are those carrying on a trade or business during calendar year 2020, including a tax-exempt organization. One of the following must be true for employers to qualify:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, OR
- The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
Note: Governmental employers are not eligible for the Employee Retention Credit. Also, self-employed individuals are not eligible for this credit for their self-employment services or earnings.
The amount of qualified wages for which an eligible employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
The definition of qualified wages depends, in part, on the average number of full-time employees employed by the Eligible Employer during 2019.
- Eligible employer averaging 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.
- If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to economic hardship described in (1) and (2) above.
Eligible employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.
In anticipation of receiving the credits, eligible employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.
More information here.
UPDATE: On 4/29/2020, the IRS released 94 additional FAQs to further clarify the Employee Retention Credit in the CARES Act. These FAQs may provide further explanation for client-specific situations and can be found here.
Employer Social Security Tax Deferral
Section 2302 of the CARES Act allows an employer or self-employed individual to delay payment of the employer portion of Social Security tax (6.2%) that otherwise would be due for the period from March 27 to Dec. 31, 2020. (IRS Notice 2020-22). In order for that delayed payment of the employer portion of Social Security tax to be considered timely, the employer would need to deposit half of that delayed amount by Dec. 31, 2021, and the other half by Dec. 31, 2022.
Section 2302 of the CARES Act offers protections for third-party payroll agents such as (1) Section 3504 agents, and (2) certified professional employer organizations (“PEOs”), by making the employer solely liable for payment of the deferred taxes if the employer directs the Section 3504 agent or certified PEO to defer payment.
- Deferral is not available to employers receiving assistance through the small business loan forgiveness provisions of the CARES Act (see GMCo blog post here)
- FFCRA & CARES Act tax credits in general apply to Employer Social Security taxes, potentially reducing or even eliminating such taxes for the balance of 2020 so employers should review if deferral is needed.
Click here to view IRS Notice 2020-22, which recognizes the relief from penalty to allow the deferral.
On April 10, 2020, The IRS provided additional FAQs regarding the employer-portion deferral of Social Security tax.