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Payroll tax credits available due to COVID-19

Apr 14, 2020

There are numerous programs signed into law to provide assistance to businesses dealing with the COVID-19 pandemic. Below is an overview of tax credits that are available to employers, including but not limited to nonprofit organizations.

Emergency paid sick leave and expanded family medical leave credits

These refundable credits were introduced in the Families First Coronavirus Response Act (FFCRA) and apply to leave taken under the act between April 1, 2020, and December 31, 2020. These credits are available when an employer pays for FFCRA emergency paid sick leave (the lesser of their regular pay or $511 per day up to a maximum of $5,110 per employee) because the:

  • Employee is subject to a federal, state or local quarantine or isolation order related to COVID-19.
  • Employee is advised by a healthcare provider to self-quarantine due to concerns related to COVID-19.
  • Employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.

The credits are also available when the employer pays for expanded family medical leave (the lesser of 67% of the regular pay or $200 per day up to a maximum of $2,000 for emergency sick leave and $10,000 for expanded family medical leave per employee) because the:

  • Employee is caring for an individual who is subject to quarantine or self-quarantine (advised by a health care provider).
  • Employee is caring for their child if the school or place of care of the child has been closed, or the childcare provider is unavailable due to COVID-19 precautions.

The employer of an employee who is a healthcare provider or an emergency responder may elect to exclude such employee from these Emergency Paid Sick Leave and Expanded Family Medical Leave provisions. The FFCRA also exempts employers with fewer than 50 employees from providing this type of leave if doing so would jeopardize the viability of their business as a going concern. These paid types of leave are in addition to existing PTO, vacation or other paid leave. Employers cannot require employees to use any existing paid leave first. 

Employers eligible for emergency paid sick leave and expanded family medical leave credits are organizations (including but not limited to nonprofit organizations) with fewer than 500 employees who provide emergency paid sick and expanded family medical leave under FFCRA. In general, government entities may be subject to FFCRA but may not entitled to the credit. 

An eligible employer can receive these credits even if they receive a Small Business Administration (SBA) Paycheck Protection Program (PPP) loan. However, “payroll costs” for purposes of receiving loan forgiveness under the SBA PPP must be reduced by any tax credits received for emergency paid sick leave or expanded family medical leave.

Employee-retention credit

Eligible employers can claim a tax credit equal to 50% of qualifying wages (defined as wages plus the cost of employer-provided healthcare up to $10,000 per employee) paid between March 13, 2020, and December 31, 2020. These credits are available to employers (except state and local governments and their instrumentalities and small business who receive an SBA PPP loan) who meet one of the following criteria:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  • 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 the quarter.

Qualifying wages are determined in one of two ways based on the average number of employees in 2019 (based on the definition of a full-time employee as anyone who was employed on an average at least 30 hours of service per week):

  • Employers with fewer than 100 employees — the credit is based on wages paid to all employeesregardless if they worked or not.
  • Employers with more than 100 employees — the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

Claiming tax credits for FFCRA and employee-retention credits

Employers that are eligible for credits for wages paid for FFCRA emergency sick leave, expanded family leave and employee retention will claim the credits on their quarterly IRS Form 941, resulting in a lower quarterly payment of employer taxes. IRS Form 941 will be revised for the second quarter of 2020 (April to June) to reflect these credits. Information will be provided in the near future to instruct employers on how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020, for the first quarter. 

If an employer anticipates credits will be in excess of the employer tax due, they can request an advance payment using IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.  he IRS Form 7200 can be filed any time before the end of the month following the calendar quarter in which the employer paid the qualified wages.

Deferral of payroll taxes

Employers and self-employed individuals can defer their payment of the employer share of social security (6.2%) attributable to the period from March 27, 2020, through December 31, 2020. The deferred payroll taxes will need to be paid as follows:

  • 50% required to be paid by December 31, 2021
  • 50% required to be paid by December 31, 2022

Employers who have received a PPP loan, but whose loan has not yet been forgiven, may defer deposit and payment of the employer's share of social security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan without incurring failure to deposit and failure to pay penalties.

Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer the employer's share of social security tax due. However, the amount of Social Security tax deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the applicable dates.

IRS penalty relief for failure to deposit employment taxes

The IRS released Notice 2020-22, which provides penalty relief with respect to employer deposits. This relief applies to deposits of employment taxes that have been reduced in anticipation of the credits for:

  • Qualified sick leave wages, qualified family leave wages and qualified health plan expenses allocable to qualified leave wages beginning April 1, 2020, and ending December 31, 2020.
  • Credits for qualified retention wages paid for the period beginning on March 13, 2020, and ending December 31,2020.

The penalty relief also covers any deferral of payroll taxes that will be paid in 2021 and 2022.

In order to qualify for the penalty relief, the employer cannot seek payment of an advance credit (Form 7200) for with respect to anticipated credits.

Questions about these COVID-19 tax credits?

Please contact your Wipfli relationship executive for additional information on any of these payroll tax credits.

For more resources to help your organization weather the impact of the coronavirus, visit our COVID-19 resource center.

This alert is for general guidance only. This information is current as of April 11, 2020. Wipfli does not undertake any obligation to update for subsequent changes or clarification to these provisions.

Author(s)

Terri Rexrode, CPA
Director
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