The CARES Act Includes Many Tax Incentives for Employers – Deferral of Payment of Employer Taxes and Employee Retention Credit

By Carlene Lowry, Mark Ziemba, Soheila Shahidi and Magnolia Movido

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”), signed into law on March 27, 2020, is a stimulus package that aims to provide liquidity to many Americans – by either giving cash or giving access to cash.  It includes direct payments, expanded unemployment insurance, loans to small and large businesses, and additional resources for health care providers, among others. It also includes numerous tax incentives, some of which are discussed below:

Deferral of Payment of Employer Payroll Taxes

Pursuant to this provision, an employer may delay payment of the employer’s 6.2% of the Social Security (Old-Age, Survivors, and Disability Insurance) tax (“Employer-Side SS Tax”).

For the period beginning March 27, 2020 and ending before January 1, 2021 (“Deferral Period”), payment of applicable Employer-Side SS Tax owed during the Deferral Period is due by:

• December 31, 2021 with respect to 50% of such amount, and
• December 31, 2022 with respect to the remaining 50% of such amount.

As long as Employer-Side SS Tax deposits are made in accordance with the above schedule, no penalty will be imposed.

There are two caveats to this provision.  First, the deferral does not apply if the taxpayer had indebtedness forgiven under Section 1106 (re: loan under the Small Business Act) or Section 1109 (re:  US Treasury Program Management Authority) of the Act.  Second, if a third party or agent is used to pay the wages (whether or not the third party is a Certified Professional Employer Organization), and the employer avails of the benefits of this deferral provision, then the employer (not the third party) will be soley responsible for paying the Employer-Side SS Tax for Deferral Period.

Similar provisions apply in relation to the self-employment tax.

Employee Retention Credit for Employers Subject to Closure due to COVID-19

The CARES Act includes a credit for “eligible employers” with disrupted operations to the extent they maintain their employees on payroll. Such employers will receive a refundable credit in an amount equal to 50% of the “qualified wages” for each employee (up to a maximum of $10,000 of qualified wages per employee), which means up to a $5,000 benefit to the employer with respect to each employee.

For purposes of this provision, “eligible employer” means an employer carrying on a trade or business in 2020, and either: (a) with respect to any calendar quarter, the operation of the trade or business is fully or partially suspended due to COVID-19 orders from an appropriate governmental authority; or (b) gross receipts decline as stated in the Act.  More specifically, with respect to (b), the benefit begins in any calendar quarter beginning after December 31, 2019, in which the employer’s gross receipts are less than 50% of gross receipts for same calendar quarter in the prior year. Despite language in the Act that implies that the benefit would last for at least three calendar quarters, subsequent guidance clarifies that the benefit ends at the end of the calendar quarter during which gross receipts are greater than 80% of gross receipts for the same quarter for 2019. In addition, the credit only applies to wages paid after March 12, 2020 and before January 1, 2021. 

Note that, for tax-exempt organizations described in Code Section 501(c) and exempt from tax pursuant to Code Section 501(a), the test in (a) above shall apply to all operations of such organization. 

“Qualified wages” means:

• For eligible employers with an average of greater than 100 full-time employees during 2019: wages paid to employees that are not providing services due to the circumstances described above (i.e., COVID-19 order or drop in gross receipts).
• For other eligible employers (not greater than 100 full-time employees): wages paid to employees (may or may not provide services in relation to such wages) during the period of suspension of business due to COVID-19 orders or during the quarters discussed in (b), above.
• Includes qualified health plan expenses allocable to such qualified wages.

There are also limitations to this credit, as follows:

• The credit cannot be applied to wages for which a credit is obtained under the Families First Coronavirus Act in relation to the Emergency Paid Sick Leave Act and Emergency Family and Medical Leave Expansion Act.
• For employers with an average of greater than 100 full-time employees, “qualified wages” may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period. 
• To determine if there is a “single employer” for the purpose of this provision, certain common control and control group rules (“aggregation rules”) apply. 
• If other credits would normally apply or other benefits are obtained under the Act, either this credit or such other benefits or credits under the Act may be limited or not permitted. 
• This credit is not available to an eligible employer that has obtained a covered loan under Section 1102 of the Act (re: Paycheck Protection Program) and if the employer obtains such covered loan during a quarter subsequent to taking this credit, the credit could be recaptured.
• Special rules will apply in the event that the employer was not carrying on a trade or business for all or part of the same calendar quarter in a prior year.  

If the credit exceeds the “applicable employment taxes” (defined above) for any calendar quarter, the excess will be treated as an overpayment that is refundable.  Further guidance will be needed to determine whether the excess may be offset against all employment taxes similar to the Families First Coronavirus Act.

Guidance in response to the COVID-19 pandemic is constantly being updated.  This article is merely intended to introduce you to the Notice and is not a substitute for careful tax planning.  If you have any questions, you are strongly encouraged to reach out to your tax advisor.

For other tax relief measures:

The CARES Act Includes Many Tax Incentives for Businesses – Expands Ability to Take Losses and Deductions

The CARES Act Includes Many Tax Incentives for Employers – Charitable Contribution Modifications

Families First Coronavirus Response Act: Summary of the Employment Provisions of the New Law

The IRS Moves Tax Day From April 15 to July 15, 2020

Arizona Postpones State Income Tax Filing and Payment Due Dates from April 15 to July 15

California COVID-19 Tax Relief

Tax and Estate Planning in the Current Environment

SW Benefits Update: Tax-Favorable COVID-19 Pandemic Relief for Employees and Employers Covered by Section 139 Programs