Three Key Tax Benefits Available to Small Business Owners
The Federal government enacted two laws in March 2020 that affect small business owners and their employees. The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Securities (CARES) Act. Both laws include important tax benefits for employers and self-employed persons. The CARES Act also provides for a Paycheck Protection loan program administered by the U.S. Small Business Administration. Those loans will become available sometime in April. It’s important to understand that employers may need to make a choice between taking the tax benefits or applying for a Paycheck Protection loan. The effective date of the FFRCA is April 1, 2020 so its time to take stock of the tax benefits and start making some important choices for your business.
Here is a summary of the three key tax benefits in the FFRCA and CARES Act.
Employee Retention Credit
Eligible employers are entitled to a refundable payroll tax credit for 50% of wages paid to certain employees during the COVID-19 crisis.
Eligible employers – The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis.
→ Before You Claim the Credit: The credit is not available to employers receiving Paycheck Protection Program loans from the Small Business Administration.
Applicable Payroll Period – Applicable for all wages paid, including cost of benefits, between March 12, 2020, and before January 1, 2021.
Calculating the Credit – The credit is computed on a calendar-quarter basis and equals 50 percent of qualified wages up to $10,000 paid to each employee or $5,000 in actual credit. Eligibility for the credit begins with the first 2020 calendar quarter in which the employer’s gross receipts declined by greater than 50 percent of the corresponding calendar quarter of the prior year, and ends with the calendar quarter following the calendar quarter in which the gross receipts exceed 80 percent of the corresponding calendar quarter of the prior year.
Refundable Payroll Tax Credits
Small and midsize employers, as well as self-employed persons, can begin taking advantage of two new refundable payroll tax credits, designed to immediately and fully reimburse them, dollar-for-dollar, for 100% of the cost of providing Coronavirus-related leave to their employees. This applies to wages paid for qualified employee leave taken between April 1 and December 31, 2020.
→ Distinction from Employee Retention Credit. The employee retention credit is applicable to all employees and all wages paid. The refundable payroll tax credits are applied only to wages paid for workers eligible and taking paid sick leave or family care leave required under the Families First legislation.
Qualifying Paid Sick Leave for Workers
▪ Paid Sick Leave – Employees can receive two weeks (up to 80 hours) of paid sick leave at 100% of the employee’s pay where the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis.
▪ Child/Family Care Leave – An employee who is unable to work because of a need to care for an individual subject to quarantine, to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing COVID-19 symptoms can receive two weeks (up to 80 hours) of paid sick leave at 2/3 the employee’s pay. An employee who is unable to work due to a need to care for a child whose school is closed or child care provider is unavailable for reasons related to COVID-19, may in some instances receive up to an additional ten weeks of expanded paid family and medical leave at 2/3 the employee’s pay.
Small Business Protection Employers with fewer than 50 employees are eligible for an exemption from the requirements to provide leave to care for a child whose school is closed, or childcare is unavailable in cases where the viability of the business is threatened. Detailed guidance is forthcoming from the Department of Labor concerning criteria for exemption.
▪ Paid Sick Leave Credit – Employers may receive a refundable sick leave credit for sick leave at the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate, for a total of 10 days.
▪ Child/Family Care Leave – Employers may claim a credit for two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
▪ Additional Child Care Credit – In addition to the sick leave credit, for an employee who is unable to work because of a need to care for a child whose school or child-care facility is closed or whose child care provider is unavailable due to the Coronavirus, eligible employers may receive a refundable child care leave credit. This credit is equal to two-thirds of the employee’s regular pay, capped at $200 per day or $10,000 in the aggregate. Up to 10 weeks of qualifying leave can be counted towards the child-care leave credit. Eligible employers are entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.
Employers receive 100% reimbursement for paid leave pursuant to the act. Health insurance costs are also included in the credit. Self-employed individuals receive an equivalent credit.
Fast Funds – How to Claim the Credit
Reimbursement will be quick and easy to obtain. When employers pay their employees, they are required to withhold from their employees’ paychecks, and later deposit with the federal government, federal income taxes and the employees’ share of Social Security and Medicare taxes. 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. Payroll taxes available for retention include withheld federal income taxes, the employee share of Social Security and Medicare taxes and the employer share of Social Security and Medicare taxes with respect to all employees (not just employees entitled to leave).
▪ 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.
Delay Payment of Employer Payroll Taxes
The CARES Act allows taxpayers to defer paying the employer portion of social security taxes through the end of 2020. This applies to all employers, regardless of whether a business has been negatively impacted by the COVID crisis, or has employees taking COVID-related leave for themselves or their family. The deferral applies only to the employer’s share of social security tax, typically 6.2% up to the social security wage base ($137,700 for 2020). It does not apply to the employer’s Medicare taxes nor to the employee’s share of social security or Medicare taxes. Specifically, all employer social security taxes otherwise required to be deposited between the date of enactment and December 31, 2020, are not required to be deposited on the normal deposit schedule. Instead, half of such taxes would be required to be deposited by December 31, 2021. The remaining deferred social security taxes would be required to be deposited by December 31, 2022.
If you have any questions about these tax benefits and how they might apply to your business, please contact Michael E. Fiffik, Esq or Lacey Gordon, Esq. They’ll be able to help you understand whether your business qualifies and which choices are best for you.