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Payroll Tax Adjustments Under the CARES Act

In addition to business income tax provisions, the Coronavirus Aid, Relief, and Economic Security (CARES) Act contains two sections that provide almost immediate payroll tax relief to certain employers. These two payroll tax relief sections seem to be directed towards large employers, including nonprofits. The delay in payment of employer payroll taxes is not available to employers who received debt forgiveness in relation to a loan received under the CARES Paycheck Protection Program, and the employee retention credit cannot be utilized by an employer who receives a loan.

Delay in Payment of Employer Payroll Taxes

The CARES Act provides for a delay in the required deposit of employer payroll taxes. Under the Act, an employer may delay the deposit of applicable employment taxes, which includes the employer portion of the OASDI payroll tax (6.2%) or employment taxes related to the Tier 1 Railroad Retirement Act.

Furthermore, a self-employed individual may delay the deposit of 50% of the individual’s self-employment tax liability. An individual’s self-employment tax liability eligible for the delay discussed above is not subject to the provisions of section 6454 (penalty underpayment of estimated tax). Accordingly, self-employed individuals will be required to pay the “employee” portion of the self-employment tax with their estimated tax payments, but not the “employer” portion

The taxes for which the deposit may be deferred are the taxes incurred from March 27, 2020 through the end of 2020. Of the taxes to be deferred, 50 percent of the deferred taxes are required to be deposited by the end of 2021. The remaining 50 percent is required to be deposited by the end of 2022.

There only seems to be one limitation regarding employers who can qualify for the deferral. The ability to defer the payment of employer payroll taxes cannot apply to taxpayers who receive debt forgiveness with respect to a loan under the CARES Paycheck Protection Program.

Employee Retention Credit

Section 2301 of the CARES Act provides a credit to certain employers who are being affected by the COVID-19. To be considered an eligible employer for this credit, the employer must have been carrying on a trade or business during 2020. In addition, the employer must either have been:

  • Ordered by a competent governmental authority to suspend or reduce business operations due to concern about the spread of COVID-19.
  • Or suffered a significant decline in business during a 2020 calendar quarter during 2020. This is deemed to occur if an employer’s gross receipts are 50 percent or less than the gross receipts of the comparable calendar quarter in the previous year.

Once an employer becomes an eligible employer on account of a significant decline in gross receipts, the employer remains an eligible employer for any succeeding calendar quarter until the employer’s gross receipts during that calendar quarter are 80 percent or more than the gross receipts in the comparable calendar quarter in the preceding year.

It is important to note that 501(c) organizations that are exempt from tax under 501(a) do have access to this credit. However, if an employer is considered eligible based on the previous requirements, the employee retention credit is not available to:

  • US government, state governments or political subdivisions
  • Any employer who receives a loan under the Paycheck Protection Program loan.

Provided the above requirements are met, and the business is not a governmental business and has not received a Paycheck Protection Program loan, a credit is provided equal to 50 percent of the qualified wages paid by a qualified employer to an employee. The maximum amount of wages eligible to be considered for the credit is $10,000 per employee.

The credit is allowed to offset the tax imposed on an employer under section 3111(a), such as the Old Age, Survivors, and Disability Insurance (OASDI) tax imposed of approximately 6.2%. In addition, the credit is allowable against an employer that is subject to the taxes imposed by section 3221, the “Tier 1” Railroad Retirement Tax Act (RRTA) tax. If the credit for the quarter exceeds the employer’s overall payroll tax liability, the excess will be refunded.

The credit is allowed with respect to eligible wages. For this purpose, qualified wages depend on the size of the employer:

If the employer has more than 100 full-time employees, qualified wages include the wages paid by the employer to the employee during the calendar quarter for periods in which the employee is not working as a result of the conditions discussed above. Qualified wages may not exceed the wages that would have been paid to the employee during the 30-day period prior to when the employee was not working.

If the employer has 100 or fewer full-time employees, eligible wages include all the wages paid by the employer during the calendar quarter.

Qualified wages include both the standard definition of wages, as defined in section 3121, as well as compensation, as defined under 3231(e). Wages also include eligible employer qualified health plan expenses that are allocable to wages, provided such amount is secluded from gross income employees under section 106 (employer contributions to accident and health plans).

Only wages paid during the period between March 13, 2020, and December 31, 2020, are eligible for the credit. Wages paid by an employer that qualify for the credit under the recently enacted Families First Coronavirus Response Act, available for mandatory paid sick leave and available for mandatory paid Family and Medical Act leave, are not included in the wages for this credit.

As you can see, the new law makes a few changes related to payroll tax. We encourage you to reach out to professionals on your Bonadio service team to discuss the best approach for you and your business. Please continue to watch for additional alerts in the days and weeks as we work to keep you informed.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We therefore make no warranties, expressed or implied, on the services provided hereunder.