RSM has summarized Department of Labor and IRS FAQs about paid leave, paycheck protection loan forgiveness and the Employee Retention Credit (ERTC).
These programs will have an impactful and immediate effect on both employers who participated in the Paycheck Protection Program as well as those who did not. It is crucial for businesses to be aware of changes to their 2020 federal taxes.
Determining Eligibility
Employers looking for payroll tax relief must first determine their eligibility. Eligibility requirements vary by program; for instance, employee retention credit standards require an in-depth review of multiple governmental orders and financial data compilation – making a professional advisor the best person to help certify eligibility in these instances.
Additionally, certain programs include special considerations for employees who are significantly financially distressed or operating a rescue or recovery startup business. Furthermore, ERC standards dictate that an employer must maintain quarterly revenues below half their prior-year revenues for optimal functioning.
Employers attempting to establish eligibility must identify all qualified wages and expenses (such as health plan costs) taken into account by each program. Due to differing requirements between programs and government directives, this process may prove difficult for many employers.
Employers must also assess their payroll taxes payable each quarter. This is usually accomplished by comparing an estimate with the federal employment tax deposit due at that time and refunding or deferring excess taxes to them. Unfortunately, this step can often become complicated by various forms of payroll tax relief programs which vary in criteria and cost-sharing arrangements between them.
Determining payroll tax credits and deferrals requires another step, typically performed manually as employer systems may not perform these calculations automatically. A third-party payroll provider or accountant might need to perform this calculation for an employer or analyze the data for certain payroll tax relief programs.
Once an employer calculates its payroll tax relief amounts, it can reduce its next federal employment tax deposit (which covers both employer and employee withholdings) by the anticipated credit amount. In some instances, credits and deferrals might exceed payroll tax liabilities entirely and no deposit is necessary; or they might cover more than needed and the excess is returned back to them as refunds.
Calculating Credits and Deferrals
Employers seeking relief from cash flow and financing strains may wish to take advantage of two forms of payroll tax relief – deferral of employer Social Security taxes and employee retention credits (ERC). Eligible companies should work with their third-party payroll providers or payroll departments as soon as possible in claiming these valuable benefits, which will appear immediately on Form 941 quarterly employment tax return – these deferrals and credits can even be applied against future deposits or requested as advance refunds!
The ERC is a refundable credit against an employer’s share of payroll tax due. It is calculated by multiplying 6.2% times 50% of “qualified wages” up to $10,000 per employee during March 12 through December 31. Eligible employers can also take advantage of an overpayment deduction.
Submit IRS Form 7200 along with an exact breakdown of amounts withheld and paid. ERC may only apply if an eligible business experiences significant decreases in gross receipts due to government orders restricting commerce, travel, group meetings or business operations in a quarter.
In 2020, the ERC is available to businesses with 500 or more employees that experienced a gross receipts decline of more than 50% during any quarter. Starting in 2021, its amount may be adjusted due to additional requirements regarding providing employees with paid sick and family leave under new laws.
Payroll tax deferral is available to all businesses without needing to make an election; however, for an employer to defer its Social Security taxes they must open an account with Social Security Administration and pay both employee and employer contributions of FICA taxes.
Employers looking to take advantage of deferral must submit a revised Form 941 with their social security taxes deferred and deducted in column A on page one, offset against their federal employment taxes due on page 2 (page 2) on that return. If the deferral exceeds any anticipated employer Social Security deposits or advance refunds, any excess may be claimed on IRS Form 720. As the pandemic progresses, payroll tax credits and deferrals should help businesses significantly decrease cash outflows while continuing operations and providing essential services to customers. ORBA has prepared a series of client alerts to assist clients in complying with these complex regulations; contact your ORBA advisor for more details.
Reporting Credits and Deferrals
Employee retention credit (ERC) and payroll tax deferral programs are designed to lower federal employment taxes, such as Social Security and Medicare taxes paid by an employer on behalf of its employees. Credits and deferrals reported on quarterly tax returns typically filed using IRS Form 941 are reported by employers who benefit from either or both programs; depending on which one an employer chooses, amounts may need to be manually calculated unless its systems automatically perform these calculations; third-party payroll providers can play an active role here, though the degree will depend upon both provider/program.
The ERC is a refundable tax credit calculated based on your business’s employment taxes paid and, to a lesser degree, employee deductions and fees paid. Employment taxes include income, Social Security and Medicare taxes withheld from employee paychecks that are sent directly to the IRS by your business; ERC credits can only be applied towards offsetting employment taxes; they cannot be used against other federal taxes such as FUTA/FECA taxes.
To qualify for this credit, your business must have experienced a significant decline in gross receipts compared to the same quarter last year – this was defined as a 50% or greater decrease compared to 2020; however, with the Consolidated Appropriations Act released at the start of 2021 amending this requirement and permitting businesses to utilize ERC even with reductions of 20% or less.
If the value of eligible credits exceeds an employer’s payroll tax deposit obligations for any calendar quarter, they can be claimed as refundable credits on Form 941 for that quarter. Alternatively, an advance refund can be requested through IRS Form 7200.
However, it remains unknown whether or not the IRS will permit an employer to use ERC accrued in the first quarter of 2020 as a reduction of required payroll tax deposits, or if instead this credit must be reported on an employer’s second-quarter Form 941 instead. It is anticipated that they will provide guidance in this matter shortly.
Recouping Credits and Deferrals
If an employer’s credits exceed its expected federal employment tax deposits (both employer taxes and employee withholdings) for the quarter, the IRS allows them to reduce their scheduled deposits of those taxes by the anticipated credit amount – this practice should be adopted so employers have access to any cash they might gain through payroll tax relief as soon as possible. Any reduction due to credits must be reported on Form 941 by employers.
Employers should carefully consider their options when making decisions on payroll tax relief options, particularly before taking advantage of them. It is crucial that employers can maximize the benefits of their payroll tax credit/deferral by combining it with COVID-19 related paid sick leave expenses credits – in particular qualifying wages that exceed those paid or incurred under COVID-19 regulations must receive priority when applied together.
Payroll tax credits will continue to be made available until December 31st 2020 and should be offset against taxable liabilities on Form 941 by employers, with any excess credit returned directly to taxpayers. Unfortunately, they cannot be used against self-employment income or fringe benefits such as healthcare premiums.
Eligible small businesses that qualify for the Payroll Tax Credit can defer their employer portion of Social Security taxes and withholding on up to $10,000 of “qualified wages” each quarter until December 31. This credit comes on top of existing credits for paying employees’ wages due to COVID-19 worker absences.
This payroll tax relief may only apply for the 2020 tax year, but its impact can extend into subsequent tax years. Therefore, it’s crucial that you review your plans for meeting 2020 filing and payment deadlines carefully and with confidence. TurboTax’s Small Business and Self-Employed Coronavirus Relief Center is here to provide more guidance regarding available COVID-19 relief programs available to them and assist businesses as they navigate them with confidence.