The Paycheck Protection Program (PPP) Increase Act of 2020 adds billions to the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The CARES Act brought good news to individuals and businesses, including substantial tax relief. The recent addition of new funds brings more good news.
The tax relief offered by the CARES Act is over and above the tax relief offered by the earlier Families FirstCoronavirus Response Act (FFCRA).
The FFCRA requires small employers—those with fewer than 500 employees—to provide limited paid leave toemployees who are affected by the coronavirus pandemic. But those businesses can claim tax credits to cover the cost of mandatory leave payments. They also get federal payroll tax relief. Finally, the IRS has graciously postponed some federal tax filing and payment deadlines.
All this COVID-19-related federal tax relief is helpful, but taking advantage of certain tax relief measures can conflict with eligibility for certain other federal relief measures that might be more valuable.
So, in many cases, you have choices and must be selective about which items you choose from the COVID-19 tax relief buffet. On the other hand, you can take advantage of some tax relief measures with no downside.
This article summarizes what we think are the most important COVID-19-related tax relief measures. We hope this will help you make smart selections from the COVID-19 tax relief program.
CARES Act Economic Impact Payments for Individuals (No Impact on
Eligibility for Other Federal Relief Measures)
Economic impact payments are the highly publicized free-money checks from the federal government. They can be up to $1,200 per individual or $2,400 for a married couple. Folks with under-age-17 dependent children can
receive up to another $500 per child. But this free money is not available to everyone. For example, you likely won’t qualify for an economic impact
payment if any of the following apply:
1.) Your adjusted gross income was greater than $99,000 if your filing status was single or married filing separately; $136,500 for head of household; and $198,000 for married filing jointly.
2.) You can be claimed as a dependent on someone else’s return. For example, this would include a child or student who can be claimed on a parent’s return.
You do not have a valid Social Security number.
3.) You are a nonresident alien.
4.) You filed Form 1040-NR, Form 1040NR-EZ, Form 1040-PR, or Form 1040-SS for 2019.
Small Employer Tax Credits and Payroll Tax Relief to Cover Required COVID-
19-Related Paid Leave for Employees (No Double Tax Benefit Allowed)
The FFCRA preceded the CARES Act. The FFCRA grants tax credits and payroll tax relief to small employers—those with under 500 employees—to cover payments that these employers must now make for COVID-19-related emergency sick leave and emergency family leave pursuant to the FFCRA.
Credit for Required Leave Payments
Small employers can collect a federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA. However, the credit covers only leave payments made during the period beginning on April 2, 2020, and ending on December 31, 2020.
The credit is increased to cover the portion of the employer’s qualified health plan expenses that is properly allocable to the emergency sick leave and emergency family leave wages paid pursuant to the FFCRA. The credit is first used to offset the Social Security tax component of the employer’s quarterly federal payroll tax
bill for all wages paid to all employees. Any remaining credit is offset against the employer’s otherwise required federal payroll tax deposits for FICA (Social Security and Medicare) taxes withheld from employee wages, federal income tax withheld from employee wages, and the employer’s share of FICA tax on employee wages. Any remaining excess is refundable, meaning the government will issue payment to the employer for the excess.
IMPORTANT: Employers can request advance payments of the credit by filing new IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
No Double Tax Benefit Allowed
The 50 percent employee retention credit allowed by the CARES Act (which we explain later) cannot be claimed for the same wages taken into account for claiming the FFCRA credit for 100 percent of required employee
Idea: Small employers should first claim the FFCRA credit for 100 percent of required leave payments and then claim the CARES Act 50 percent employee retention credit for other eligible wages. The FFCRA credit for required employee leave payments is not available to employers that are already receiving the pre-existing federal credit for paid family and medical leave under Internal Revenue Code Section 45S.
Payroll Tax Relief
Emergency sick leave and family leave payments mandated by the FFCRA are exempt from the 6.2 percent Social Security tax component of the employer’s federal payroll tax that normally applies to wages. Employers must pay the 1.45 percent Medicare tax component of the federal payroll tax, but they can claim a credit for that outlay.
Leave Credits for Self-Employed Individuals
If you are a self-employed individual who is affected by the coronavirus emergency, the FFCRA allows you to claim a refundable credit against your federal self-employment tax bill.
If the credit exceeds your self-employment tax bill, the government will issue you a payment for the excess. The credit is equal to
1.) 100 percent of the sick-leave equivalent amount, plus
2.) 67 percent of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school or childcare location.
The sick-leave equivalent amount equals the lesser of
1.) your average daily self-employment income, or
2.) $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus,
3.) $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or to care for your child following the closing of the child’s school or childcare location due to the coronavirus emergency.
Average daily self-employment income means your net self-employment earnings for the year divided by 260. In addition, you can claim a coronavirus emergency family leave credit for up to 50 days. The credit amount equals the number of qualified family leave days multiplied by the lesser of
1.) $200, or your average daily self-employment income. The maximum total family leave credit is $10,000
(50 days x $200 per day).
2.) These credits are allowed only for days during the period beginning on April 1, 2020, and ending on December 31, 2020.
Important: As of this writing, there was no way for self-employed inviduals to request advance payment of these credits. Will the IRS do something to allow advance payments? Possibly later
Important: To prove your entitlement to the sick leave tax breaks, you must maintain documentation of how you were affected.
CARES Act Employee Retention Credit (Can Conflict with Eligibility for Other
Federal Relief, and No Double Tax Benefit Allowed)
The CARES Act allows a refundable federal payroll tax credit that has been dubbed the employee retention credit. The credit amount equals 50 percent of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. The credit is subject to an overall wage cap of $10,000 per eligible employee.
Eligible employer status for the 50 percent employee retention credit is determined on a 2020 calendar-quarter basis. The credit is available to all employers, including non-profits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel, or group meetings due to COVID-19.
The credit can also be claimed by employers that have experienced a decline of greater than 50 percent in gross receipts for a 2020 calendar quarter compared with the corresponding 2019 calendar quarter. But the credit is disallowed for quarters following the first 2020 calendar quarter during which gross receipts exceed 80 percent of gross receipts for the corresponding 2019 calendar quarter.
ACE, LLC, has gross receipts of $180,000, $100,000, and $230,000 in the first, second, and third calendar quarters of 2020.
ACE’s gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019.
ACE’s gross receipts for the first, second, and third quarters of 2020 are 86 percent, 43 percent, and 92 percent of gross receipts for the corresponding 2019 quarters.
Therefore, ACE had a decline of greater than 50 percent in gross receipts for the second quarter of 2020. Based on that decline, ACE is an eligible employer for purposes of the 50 percent employee retention credit for the second and third quarters of 2020.
For the fourth quarter of 2020, ACE is ineligible for the credit because gross receipts for the third quarter of 2020 exceeded 80 percent of gross receipts for the third quarter of 2019.
Warning: Obtaining the SBA Loan under the CARES Act PPP Precludes
Claiming 50 Percent Employee Retention Credit
If a small employer obtains a potentially forgivable Small Business Interruption Loan guaranteed by the Small Business Administration (SBA) and issued pursuant to the CARES Act PPP, the employer cannot also claim the
50 percent employee retention credit. It’s either one or the other.
PPP loans can be up to $10 million, so they can be a small-business lifesaver that may be too valuable to pass up. In general, an eligible employer for purposes of the PPP is one that has fewer than 500 employees—including a sole proprietorship, a self-employed person, or a private non-profit organization. Businesses in certain industries can have more than 500 employees if they meet SBA size standards for those industries. The PPP also applies to self-employed individuals who operate without any W-2 employees.
The 50 percent employee retention credit is available to cover eligible wages paid between March 13, 2020, and December 31, 2020.
For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000-per-employee wage cap), regardless of whether employees have been furloughed due to COVID-19.
For an employer that had an average of more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours because of the employer’s closure or reduced gross receipts due to COVID-19 are eligible for the credit (subject to the overall $10,000-per-employee wage cap).
For purposes of the 50 percent employee retention credit, eligible wages are increased to include qualified health plan expenses allocable to those wages.
Important: To be totally clear: the amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses.
CVEC is an eligible employer. The company pays $10,000 in eligible wages to employee Max in the second quarter of 2020. The 50 percent employee retention credit is allowed for the wages. The credit equals $5,000 (50 percent x $10,000).
CVEC also pays employee Noel $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The 50 percent employee retention credit for wages paid to Noel in the second quarter is $4,000 (50 percent x $8,000). The credit for wages paid to Noel in the third quarter is limited to $1,000 (50 percent x $2,000), due to the $10,000 wage cap. Any additional wages paid to Noel are ineligible for the credit, due to the $10,000 wage cap.
No Double Tax Benefit Allowed
The 50 percent employee retention credit cannot be claimed for emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the FFCRA. Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA, as explained earlier. No 50 percent employee retention credit is allowed for wages taken into account for purposes of claiming the pre-existing federal Work Opportunity Credit under Internal Revenue Code Section 21.18.
Finally, no 50 percent employee retention credit can be claimed for wages taken into account for purposes of claiming the pre-existing federal employer tax credit for paid family and medical leave under Internal Revenue Code Section 45S.19
Claiming the 50 Percent Employee Retention Credit
Technically, an eligible employer’s allowable 50 percent employee retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes (6.2 percent of the first $137,700 of an employee’s 2020 wages).
But the credit is a so-called refundable credit. That means the employer can collect the full amount of the credit even if it exceeds the federal payroll tax liability. According to an FAQ on the IRS website and the instructions for new IRS Form 7200, the allowable credit can be used to offset all of the employer’s federal payroll tax deposit liability, including FICA (Social Security and Medicare) taxes and federal income tax withheld from employee paychecks and the employer’s portion of FICA tax.
Advance Payment of the Credit
If the employer’s tax deposit liability is not big enough to absorb the 50 percent employee retention credit, the employer can apply for an advance payment of the credit by submitting new IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
Triple O Corporation is an eligible employer. Triple O paid $20,000 of eligible wages and is therefore entitled to a 50 percent employee retention credit of $10,000. The company has an upcoming quarterly federal payroll tax deposit obligation of $8,000, to be reported on IRS Form 941, which includes taxes withheld from all of its employees on wage payments made during that quarter.
Triple O can keep the entire $8,000 as part of its allowable 50 percent employee retention credit. The company can then file a request for an advance payment of the remaining $2,000 credit by submitting IRS Form 7200.
CARES Act Employer Payroll Tax Deferral Relief (Can Conflict with Eligibility
for Other Federal Relief)
Under the CARES Act payroll tax deferral deal, your business can defer the 6.2 percent employer portion of the Social Security tax component of FICA tax owed on the first $137,700 of an employee’s 2020 wages—for wages paid during the deferral period.
The deferral period began on March 27, 2020, the date the CARES Act became law, and will end on December 31, 2020.
Due Dates for Deferred Tax
Your business must cough up the deferred payroll tax amount in two installments:
1.) Half of the deferred amount must be paid by December 31, 2021.
2.) The remaining half must be paid by December 31, 2022.
Your business can obtain a lot of Social Security tax deferral. The deferral can really help your business meet its cash flow challenges during this COVID-19 pandemic.
This payroll tax deferral deal is available to all employers, with no requirement to show any specific COVID-19-related impact.
Self-Employed Individuals Can Defer 50 Percent of the Social Security Tax
Component of the Self-Employment Tax
If you are self-employed, you can defer half of your liability for the 12.4 percent Social Security tax component of self-employment tax for the deferral period.
The deferral period began on March 27, 2020, and will end on December 31, 2020. As you know, the 12.4 percent Social Security tax component of the self-employment tax hits the first $137,700 of your 2020 net self employment income (Schedule C income multiplied by 0.9235).
The self-employment tax deferral privilege is allowed for 6.2 percent of net self-employment income that you collect during the deferral period, subject to the $137,700 net self-employment income limit on the Social Security tax component of the self-employment tax.
You must cough up the deferred self-employment tax amount in two installments:
1.) Half of the deferred amount must be paid by December 31, 2021.
2.) The remaining half must be paid by December 31, 2022.
This can amount to enough self-employment tax deferral to help your self-employed business get through the COVID-19 mess, along with other relief that you may be entitled to claim. You won’t face any penalties or interest charges for reducing your estimated tax payments by the allowable deferred self-employment tax amount.
Warning: Forgiveness of Certain Loans under CARES Act Provisions
Precludes Eligibility for Payroll Tax and Self-Employment Tax Deferral Privileges.
The payroll tax deferral privilege is unavailable to any employer that has forgiven SBA loans issued under the PPP offered by the CARES Act (explained earlier).
Same for any employer that has loans forgiven under the CARES Act Treasury Program Management Authority.
The federal government has already unleashed trillions of dollars of COVID-19-related economic relief, including significant tax relief. The idea is to keep businesses in business. As you learned in this article, there’s much for the small business to know and a good deal of monetary help available. But you must be aware that some of the federal relief measures prohibit your use of others. So you have choices, as we explained, and those choices will require some study on your part to obtain your best result.