Payroll Tax Relief for Small Businesses Impacted by COVID-19

As we approach the end of the year, it’s good to know that many Haverhill area businesses can enjoy several types of payroll tax relief on their 2020 federal tax returns. In some cases, you, as a business owner, need to act fast to take advantage of these credits. Though many of these apply to all businesses, we will focus on small businesses.
What are the changes? Well, for one, they include a payroll tax deferral and several refundable payroll tax credits. These changes are temporary and originate from the Coronavirus Aid Relief and Economic Security or CARES Act and the Families First Coronavirus Response Act or FFCRA. Together, these laws help employers and businesses survive during the economic downturn caused by the novel coronavirus pandemic. Here is some information about each of the types of relief that are available to you (as an employer) during the 2020 calendar year.
Deferral of payroll taxes
Under the CARES Act, all Haverhill area businesses that have employees can enjoy payroll tax relief by deferring the payment of the business’s portions of the Social Security taxes that you would have had to submit to the government for the period from March 27, 2020 through December 31, 2020. You must still deduct the employee’s portions of Social Security taxes and remit them, but you can defer the 6.2% that you were required to pay. You can then pay the deferred Social Security obligations in installments. The first installment, equal to 50% of what you owe, is due on December 31, 2021 and the second installment is due by December 31, 2022. You will have to resume your normal schedule of remitting the payroll taxes after December 31, 2020. It’s only the amounts that accrued during the stated dates that are paid later.
You are not required to take a special election to defer these payments and deposits. Instead, these changes are reflected on Form 941, which is the employer’s quarterly return (note that the IRS did not have the updated form until later in the year, so they have procedures for those who deferred before the new forms came out).
This deferral only applies to Social Security taxes, you must remit your portion of Medicare taxes as usual.
What if you are self-employed without employees? This applies to you as well. When you do your taxes for 2020, for earnings during the period noted above you can defer the employer Social Security tax part of the self-employment taxes.

Employee retention credit
The CARES Act also provides a credit for retaining employees to Haverhill area businesses affected by the pandemic. This credit is meant to help you, as an employer, to keep your employees on payroll and is available to a majority of employers. The credit is equal to one-half of the qualified wages up to $10,000 per employee paid from March 13, 2020 through Dec. 31, 2020. The credit cannot be more than the amount of your portion of the social security tax (the same tax that is deferred). Note, that if you have 100 or fewer employees then the credit is up to 100% of the employee’s wages. This applies only to full time employees. If you have more than 100 employees then the credit only applies to wages paid when the employee was not providing services to the you – i.e., not coming into work, but still getting paid.

Who is eligible for the employee retention credit?
As an employer you qualify if:

1. Your operations have been partially or completely suspended because of government orders* related to the pandemic
OR
2. your business has experienced a decline of at least 50% in your gross revenues during a relevant quarter as compared to the same quarter during 2019 (for example, compare total revenue for the third quarter of 2019 with the third quarter of 2020, if the 2020 revenue was half or less than the 2019 revenue then you qualify)

*The relevant governmental order cannot be a closure recommendation. It must be a closure mandate. For example, a restaurant or bar that was ordered to close to help stop the spread of the virus may qualify, but a retail store that chose to close because of a recommendation might not.

If you have your own business but are not organized as a partnership or corporation, you can claim the credit for the wages that you paid to your employees but not for the wages you paid to yourselves. If you received a PPP loan you are also eligible to defer those payments under the PPP Flexibility Act.

How to claim the credit for employee retention
Businesses can claim the employee retention credit immediately by retaining payroll tax funds in an equivalent amount for their quarterly deposit amounts. You can submit Form 7200 to the IRS if the retained payroll taxes will not cover the entire credit to receive advance payments. Or you can wait until you file your 2020 taxes to get the credit.

Small Business Administration Interruption loans and the credit

Businesses that have received SBA interruption loans are not eligible to receive the credit for employee retention since the credit is meant to serve as an alternative to the loan program. The credit can only be claimed if you have not received an interruption loan from the SBA.

Paid leave tax credit
Under the FFCRA, most mid-sized and small businesses (those with less than 500 employees) are required to give employees paid leave when they are unable to work because of the pandemic, either because the employee is sick or is quarantined by government mandate or medical recommendation. Also, if the employee must take time off to care for a sick family member or because the children are home due to school closures and child care is not available. However, this Act also includes tax credits for paid leave on a dollar-for-dollar basis.

Who is eligible for paid leave tax credits?
If your business is required to provide health benefits to an employee than you are eligible for the credit. However, if you have fewer than 50 employees you can be exempted from the FFCRA’s childcare requirements. The exemption applies if your business can demonstrate that the childcare expense would threaten your business’s viability.
Required paid leave credits
If your business has employees who are quarantined, show symptoms, or are diagnosed with COVID-19 then you can receive 100% credit for each employee who has to take paid sick leave. The business must pay the employee his or her regular wages for up to 80 hours through paid sick leave. The expense will be reimbursed by the tax credit up to $511 per day of the required paid sick leave. Maximum credit is $5,110 per employee (10 sick days).

If an employee is forced to take leave to care for a family member for pandemic-related circumstances, including caring for a child whose school is closed or for a family member who is under quarantine, the credit will reimburse you for two-thirds of the regular wages up to $200 per day for up to 10 days (maximum $2,000 per employee).

As an employer you 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 under certain circumstances. The credit can be claimed for up to $200 per day, maximum $10,000 per employee. Employers are also eligible for an additional credit based on the cost of providing health insurance coverage for the eligible employee during the leave period.

How to claim the paid leave credits
If you own a business that was required by the FFCRA to provide paid leave to an employee because of COVID-19 you can subtract the funds you paid for the paid leave from your deposits of payroll taxes, including the employee’s and employer’s share of Medicare and Social Security taxes and the federal income taxes that would have been paid. If the payroll taxes that you would have remitted are insufficient to cover the cost of the paid leave then you can ask for an accelerated refund.

These temporary changes are effective through Dec. 31, 2020. Businesses can benefit from claiming the refundable payroll tax credits and deferring the payment of their portions of payroll taxes. Tax relief can help Haverhill area businesses to continue operations and to remain viable during the pandemic so that they can survive.