Update, 6/4/20: Congress has passed the Paycheck Protection Program Flexibility Act, which alters the rules around the PPP, including whether business owners can take advantage of certain payroll tax extensions and certain loan usage deadlines. This article has been updated to reflect those changes.
As small businesses across the country fight to remain in operation and generating revenue despite the coronavirus pandemic, making payroll has emerged as one of the biggest ongoing dilemmas for business owners.
Businesses are now compromised in terms of their ability to pay their employees, due to a combination of health concerns, shelter-in-place restrictions, limited foot traffic, and reduced spending by customers. No business owner wants to lay off their staff, but if money isn’t coming in, there are few other options.
That’s why many of the financial relief packages passed by the federal government have focused on payroll. Keeping small businesses operational and workers employed is critical to the welfare of millions of people and may help speed up the recovery.
The federal government has developed several payroll relief options for small businesses. One is the Paycheck Protection Program; another is payroll tax relief centered around payment deferrals and the Employee Retention Credit; and there is also tax relief for businesses required to cover paid leave for their employees.
Let’s review what payroll taxes changes have been introduced and how they might affect your business.
Payroll Tax Payment Extensions
Both employees and employers pay an equal portion of the Social Security payroll tax, a 6.2% rate in 2020. Employers can defer their portion of this tax, paying 50% by December 31, 2021 and the other 50% by December 31, 2022.
Self-employed workers can also defer half of their self-employment taxes on earnings after the date of the CARES Act—paying 25% by December 31, 2021 and the additional 25% by December 31, 2022.
While this deferment doesn’t save businesses money, it does allow them to retain much-needed capital in the short term.
Note: Employers are still eligible to receive a loan under the Paycheck Protection Program if they utilize this deferment. (Note: This was previously not the case under the CARES Act.)
The Employee Retention Credit
Businesses impacted by the novel coronavirus can also use an “Employee Retention Credit,” made available under the CARES Act.
To qualify for using this credit, businesses must either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
- Experience a significant decline in gross receipts during the calendar quarter. (This decline begins with the first quarter in which a business’s gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019.)
According to the IRS, the Employee Retention Credit is a fully refundable tax credit for employers, equal to 50% of qualified wages 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 with respect to each employee for all calendar quarters is $10,000, meaning the credit for an employer for wages paid to any employee is $5,000.
How to Claim the Employee Retention Credit
There are two ways that a small business can make use of this tax credit. Which route they take depends on whether they want immediate access to these funds.
To receive credit later, businesses can either make the required deposits on either a semi-weekly or monthly basis, as then claim the tax credit when they file IRS Form 941 quarterly.
If a business needs cash flow help immediately, the business can go ahead and keep the taxes they would normally deposit and use it to maintain payroll. The Treasury makes advance payments of the tax credit, and the business is not assessed penalties for not submitting those taxes. Then they will report having taken that credit when they file Form 941.
How to Decide Whether to Take CARES Act Payroll Tax Relief
As mentioned above, the Employee Retention Credit cannot be used in conjunction with the Paycheck Protection Program from the SBA.
That means as a business owner, you’ll need to decide whether taking the Employee Retention Credit is a more effective relief measure than taking out a loan.
It will help to understand the specifics of the Paycheck Protection Program, specifically as they relate to loan forgiveness. Your PPP loan will be forgiven by the SBA if you use your loan proceeds on payroll and other financial obligations such as rent, mortgage interest, and utilities over the first 24 weeks after receiving your loan—assuming you retain your workforce and do not cut their wages by more than 25%.
If you expect to lay off your workers or reduce their wages and not return to full capacity by June 30, 2020, you’ll need to repay your loan at 1% interest. For some very small businesses, taking the payroll tax relief might be a more immediate source of relief that won’t result in needing to repay a loan plus interest.
The best advice will come from a financial advisor—your accountant, bookkeeper, or other trusted advisor—who knows the specifics of your business and can help you decide which track is the right one for you to take.
Mandatory Paid Leave Tax Credits
In addition to the CARES Act, the federal government also passed the Families First Coronavirus Response Act, which included payroll tax changes that small business owners should be aware of.
The Families First Act requires emergency paid sick leave for an eligible employee in coronavirus quarantine, or one seeking a COVID-19 diagnosis. This is limited to $511 a day for 10 days, or $200 a day for 10 days to care for a quarantined family member or child whose school or child-care center is closed.
It also requires that small business employees be allowed to take up to 12 weeks of family leave if that employee or family member is in quarantine, or if their child’s school or child care is closed due to the coronavirus outbreak. The business must pay at least two-thirds of the employee’s pay (up to $200 per day), maxing out at $10,000 per employee.
To cover these costs, small businesses can collect a tax credit equal to 100% of qualified emergency sick leave and family leave payments. The credit covers leave payments until the end of 2020. In addition, sick leave and family leave payments mandated by the Act are exempt from the 6.2% Social Security tax component of the employer’s federal payroll tax burden.
Self-employed workers can also take a refundable credit against their federal income taxes, including the self-employment tax hit.
These mandatory leave tax credits don’t interfere with your ability to take a Paycheck Protection Program loan or other tax relief.
The Bottom Line
While there is still some uncertainty as to how SBA loans will be made available to small business owners impacted by the coronavirus, payroll tax relief is a clearer path forward for some businesses. Review the specifics of what’s offered with your financial advisor to decide how to proceed.