COVID-19 Tax Relief

Written by Jeffrey Davine

COVID-19 Related Legislation

As has been widely publicized, the federal government has enacted legislation that is  designed to provide tax and other relief to employers as a result of the COVID-19 crisis.  The tax relief is principally in the form of tax credits for payroll taxes that an employer is required to remit to the IRS when paying wages to its employees.

One of the laws enacted is the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act).  The CARES Act was signed into law on March 27th.  It provides for a refundable payroll tax credit for employers whose businesses have been adversely affected by the Coronavirus.

Another statute enacted is the Families First Coronavirus Response Act (the “FFCRA”).  It was signed into law on March 18th.  The FFCRA provides small and midsize employers with refundable payroll tax credits to reimburse them for the cost of providing paid sick and family leave wages/salary to employees for an absence that is related to COVID-19.

The relief that is provided by both of these laws applies to both for-profit and nonprofit entities.

The CARES Act Relief

In late March, the Internal Revenue Service issued a news release (IR-2020-62), which describes the payroll tax credit (which is sometimes referred to as the “Employee Retention Credit”) that is provided for by the CARES Act and the procedures for applying the credit.  As stated, the credit is a refundable one- more on this below.  The procedures contained in the IRS news release also apply to the credits available under the FFCRA. In addition, the IRS has published a series of questions and answers on its website that are designed to provide some practical advice as to how the Employee Retention Credit can be claimed.  These questions and answers can be found at: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act.

The Employee Retention Credit under the CARES Act is available to eligible employers.  Eligible employers include tax-exempt organizations.  The Employee Retention Credit is equal to 50% of qualified wages paid to an employee during the period March 13, 2020, through December 31, 2020.  The credit is used to offset the employer portion of the Social Security taxes that must be remitted when paying wages to an employee.

An eligible employer, however, cannot claim the Employee Retention Credit if it receives a small business interruption loan under the Paycheck Protection Program that is authorized under the CARES Act.

An eligible employer is an entity that: (i) had its business fully or partially suspended by the government due to COVID-19 during any calendar quarter in 2020 or (ii) whose gross receipts are below 50% of the comparable quarter in 2019.

For an eligible employer that had more than 100 full time employees during 2019, qualifying wages are wages that are paid to an employee who is not providing services due to the effects of the Coronavirus.  For an eligible employer that had 100 or fewer full time employees during 2019, if the employer’s business is fully or partially suspended by the government due to the Coronavirus during a calendar quarter in 2020 or its gross receipts are below 50% of the comparable quarter in 2019, all of its wages paid during that period are treated as qualifying wages and are eligible for the Employee Retention Credit.

The qualifying wages cannot exceed $10,000 per employee for all quarters (which equates to a maximum credit of $5,000) and includes an allocable portion of the cost of employer-provided healthcare.  For example, assume that an employee of a company (which had more than 100 employees during 2019) is unable to work as a result of the Coronavirus and the employee is paid $14,000 during the second and third quarters of 2020.  The Employee Retention Credit for that employee will be $5,000 (50% of $14,000, subject to a maximum credit of $5,000).

The Employee Retention Credit is a “refundable” one.  This means that if the Employee Retention Credit exceeds the employer’s Social Security tax liability for all of its employees, the excess amount will be refunded by the IRS.  For example, assume that an eligible employer pays $10,000 in qualified wages to an employee during the second quarter of 2020.  As a result, the Employee Retention Credit amount is $5,000 (50% of $10,000).  This credit amount may be applied against the employer’s share of the Social Security taxes that it is required to remit with respect to all employee wages paid during that quarter.  Any excess credit over the employer’s share of the Social Security taxes is treated as an overpayment and will be refunded by the IRS (after offsetting other tax liabilities on the employment tax return).

If the tax credits for a particular quarter exceed the amount that an eligible employer would be required to deposit during that quarter, the employer can file IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).  The filing of Form 7200 requests that the IRS refund the excess credit.  For example, if an eligible employer is entitled to a credit of $5,000 with respect to a particular employee and is required to deposit $7,000 in employment taxes, the employer can reduce the amount of its deposits by the $5,000 credit and will only be required to deposit $2,000. If an employer’s credit is $10,000 and the employer is required to deposit $9,000 in employment taxes, the employer can retain the entire $9,000 and submit IRS Form 7200 to request a refund of the remaining $1,000 credit.

The FFCRA

The FFCRA created new employee rights, beginning as of April 1st.  The new rights require certain employers to provide paid emergency sick leave and expanded emergency family and medical leave as a result of certain specified conditions related to the Coronavirus.  In exchange for providing the paid sick/family leave, an eligible employer can claim a payroll tax credit, similar to the credit described above with respect to the CARES Act.

Employers that are eligible to claim the payroll tax credit include businesses and tax-exempt organizations that: (i) have fewer than 500 employees and (ii) are required under the FFCRA to pay “qualified sick leave wages” and/or “qualified family leave wages” for leave taken beginning on April 1, 2020 and ending on December 31, 2020.

An eligible employer may claim the tax credits on its federal employment tax returns (e.g., Form 941, Employer’s Quarterly Federal Tax Return).  In addition, an eligible employer can claim the benefit of the credit more quickly by reducing its federal employment tax deposits (as described above with respect to the CARES Act).  If an eligible employer has a federal employment tax liability that is less than the amount of the credits, the employer can request an advance payment of the credits from the IRS by submitting IRS Form 7200.

The FFCRA provides that employees of eligible employers can receive two weeks of paid sick leave at 100% of the employee’s pay if the employee is unable to work because the employee is quarantined, and/or experiencing COVID-19 symptoms, and seeking a medical diagnosis.  An employee who is unable to work because of a need to care for an individual who is subject to quarantine, to care for a child whose school is closed or because the child’s care provider is unavailable for reasons related to COVID-19, and/or the employee is experiencing substantially similar conditions as specified by the U.S. Department of Health and Human Services, can receive two weeks of paid sick leave at 2/3 of the rate of the employee’s normal 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 10 weeks of expanded paid family and medical leave at 2/3 the employee’s pay.

The payroll tax credit covers 100% of up to 10 days of the qualified sick leave wages and up to 10 weeks of the qualified family leave wages (and any qualified health plan expenses allocable to those wages) that an eligible employer paid during a calendar quarter, plus the amount of the eligible employer’s share of Medicare taxes imposed on those wages.  Qualified sick leave and qualified family leave under the FFCRA are in addition to an employee’s preexisting leave entitlements.

With respect to an employee who is unable to work because of a Coronavirus quarantine or self-quarantine or has Coronavirus symptoms and is seeking a medical diagnosis, the eligible employer can 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.

For an employee who is caring for someone with Coronavirus, or is caring for a child due to one of the reasons specified above, an eligible employer can claim a credit for 2/3 of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate, for up to 10 days.  In addition, an eligible employer is entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

In addition to the paid sick leave credit, for an employee who can’t 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, an eligible employer may receive a refundable child care leave credit. This credit is equal to 2/3 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.  An eligible employer is entitled to an additional tax credit determined based on costs to maintain health insurance coverage for the eligible employee during the leave period.

For example, assume that an eligible employer pays $10,000 in qualified sick leave wages and qualified family leave wages during the second quarter of 2020.  The eligible employer will not owe the employer’s share of the Social Security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax.  Its credits total $10,145, i.e. the $10,000 in qualified leave wages plus $145 for the employer’s share of the Medicare tax.  This example does not include any qualified health plan expenses allocable to the qualified leave wages.  This credit can be applied against any federal employment taxes that the eligible employer is liable for on any wages paid during the second quarter of 2020.  Any credit in excess of the federal employment tax liabilities will be refunded to the employer.  The employer must still withhold the employee’s share of social security and Medicare taxes on the qualified leave wages paid.

Conclusion

The rules governing the available tax credits and the businesses that are eligible to claim the credits are complex.  It is likely, however, that the IRS will require employers to strictly adhere to these rules in order to claim the available tax benefits.  Employers will need to maintain adequate substantiation to show the wages paid and the computation of the tax credits.  If an employer fails to maintain these records, the IRS could disallow the application of the credits.  Please contact one of the members of our COVID-19 team for further information.

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