New Act Gives Employers Payroll Tax Deferral & Refund Possibilities
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) went into effect. The Act has wide-reaching provisions, but all are designed to provide relief from the economic impacts of the COVID-19 crisis. New payroll provisions offer relief for employers who continue to pay their employees even though the employer has been required to fully or partially shut down, and/or, for small businesses, if the employer remains open but the business’ gross receipts have significantly declined compared to the prior year. These forms of relief are designed to encourage employers to continue paying workers even during a shut down and/or significant reduction in gross receipts due to the COVID-19 crisis.
To achieve this relief for employers who continue to pay their employees through the COVID-19 crisis, the Act gives employers a 50% refundable credit against payroll taxes owed for “qualified wages” paid to employees during a shut down or partial shutdown due to coronavirus, or for wages paid to employees during a quarter where the employer’s gross receipts were less than 50% of what they were in the same quarter of 2019. The 50% refundable credit potentially covers wages paid after March 12, 2020 and through December 31, 2020.
The “qualified wages” subject to the credit depends in part on the size of the employer’s business. If the employer had more than 100 employees in 2019, the “qualified wages” are only the wages paid during the time the business is actually fully or partially shut down by government order. If the employer had fewer than 100 employees in 2019, the “qualified wages” include wages paid during the full or partial shutdown, as well as any wages paid during a quarter in which the employer’s gross receipts are less than 50% what they were in same quarter of 2019, which continues until the employer has a quarter where its receipts exceed 80% of what they were in the same quarter of the prior year (but ending on December 31, 2020).
“Wages” includes qualified health plan expenses allocated to wages. However, the maximum qualified wages eligible for the credit per employee cannot exceed $10,000 for all quarters. Further, if the employer has taken advantage of the business loans authorized by the CARES Act (which creates loans on specified terms to cover, for instance, payroll), the employer is not eligible for the credit. Finally, wages paid pursuant to the Emergency FMLA Expansion Act and Emergency Paid Sick Leave Act are not subject to this credit, as those Acts offered a separate refundable payroll tax credit for wages paid as a result of employer obligations under those Acts.
Employers can take advantage of the credit immediately and it may be claimed with the filing of the payroll tax return. It is anticipated that the IRS will issue new forms to effectuate this change. If the amount of credit to which the employer is entitled exceeds the employer’s payroll tax liability for that quarter, the employer will get a refund. For employers whose credit permitted under the Act does not exceed the employer’s payroll tax liability for that quarter, the employer still gains the advantage of the immediate credit, thereby reducing the employer’s payroll tax liability. Furthermore, if the employer does still owe payroll taxes notwithstanding the credit, the Act delays payment of payroll taxes without penalty, giving employers through December 31, 2021 to pay 50% of any payroll tax owed through December 31, 2020, and giving employers through December 31, 2022 to pay the remaining 50% of any payroll tax due through December 31, 2020. Accordingly, employers are able to defer payment of the payroll tax but obtain an immediate credit, and possibly a refund if the employer’s payroll tax liability for a given quarter exceeds the allowable credit.
With the new CARES Act, employers have new opportunities to reduce and defer their payroll tax obligations, and potentially obtain a refund resulting from wages paid during the COVID-19 crisis. The landscape is changing quickly for employers during this unprecedented time. Stokes Lawrence’s employment attorneys can help employers navigate this challenging new territory and ensure that employers take advantage of all their options.