Payroll Tax Relief is a credit or deduction off your payroll taxes that allows for lower than estimated payments to the IRS or another tax agency. To be eligible, your actual payments have to fall below their due amount.
Recently, two COVID-19 aid packages became law that incentivize employers to keep employees on the payroll through payroll tax credits. Evaluating eligibility for these programs requires careful deliberation with professional advisors.
Credits and Deferrals
Payroll taxes are withheld from employee paychecks in order to fund government programs such as Social Security, Medicare and unemployment insurance. Employers are responsible for withholding these taxes from employee wages and depositing them with the federal government on a regular basis. With COVID-19’s impact leading to significant business activity decline and some businesses having difficulty paying their payroll taxes, tax relief was necessary from the IRS in order to help these affected firms meet this obligation.
The IRS allows employers to secure credits and deferrals through reduced employment tax deposits or advanced refunds. To do this, employers are required to compute payroll tax credits in a given period and compare them against federal employment taxes that must be paid; any excesses can then be either returned directly back to them or applied toward their next calendar quarter’s payroll taxes due. A revised Form 941 includes a worksheet specifically for this purpose.
Employers can also defer federal income tax withholding, hospital insurance (Medicare) tax and the employer’s share of Social Security tax for employees they retain through retention credits. This benefit is available to both full-time employers and self-employed individuals; however, those remitting payroll taxes through an agent under IRC Section 3504 or professional employer organizations (CPEOs) may need to request this deferral themselves.
CARES Act included various programs and incentives designed to aid businesses during a pandemic, with perhaps one of the most valuable being a payroll tax refund credit, which provides eligible businesses a refundable tax credit of at least 20% of gross receipts lost during each quarter; whether through actual revenue decline or shutdown.
The CARES Act also made changes to IRC 3111(f), which grants qualified research and development companies that operate under Subchapter S Corporation status a small business credit. To claim it, QSBs must complete Form 6765PDF and attach it with their timely filed income tax return for the year they claim it.
Refund Options
The Employee Retention Credit (ERC) is an invaluable tool that enables eligible businesses to recover some or all of the payroll taxes withheld from employees during the COVID-19 pandemic, helping small businesses keep their doors open during this crucial time and giving our economy an extra boost.
Due to the COVID-19 pandemic, various federal programs and aid packages have been instituted in response to provide assistance for businesses and workers affected by it. Many of these programs provide credits against various payroll taxes while some even enable retroactive claims or refunds.
One of the more sought-after programs is COVID-19 Payroll Tax Refund, which offers reimbursement of payroll taxes paid to eligible businesses that kept employees employed throughout COVID-19 pandemic. Although refund amounts may seem small at first, they can add up quickly for businesses who qualify and claim them.
For businesses to qualify for the ERC, they must fulfill certain eligibility requirements as set out by the CARES Act and Consolidated Appropriations Act of 2021. Unfortunately, many employers remain unaware of this valuable relief program and could potentially leave money on the table by not taking advantage of it.
Determining the qualification requirements can be accomplished through reviewing Form 8974PDF; however, if unsure it would be prudent to reach out for expert assistance such as Innovation Refunds who has helped thousands of business owners claim over $2 billion in ERC refunds.
Once your business meets eligibility requirements, claiming its credit is easy. There are two options for doing this – either withholding the expected tax credit from federal employment taxes due for a given period or depositing all taxes due and seeking refund on Form 941 quarterly form.
If you elect to withhold anticipated credits from payroll taxes, be sure to report this on Form 941 quarterly returns by adding them as lines 7 or 8974PDF attachments on that return. In either case, refunds can be obtained by filing Form 8974PDF with the IRS in addition to filing your Form 941 return.
Eligibility
Payroll tax relief isn’t something you can simply apply to your business and get. Instead, there are several steps and forms that must be completed before any credit can be granted – which is why working with an organization who specialize in this process could save time while guaranteeing all paperwork is filed correctly.
The COVID-19 payroll tax credit is a refundable credit based on payroll taxes paid to employees of your business, often known as Employee Retention Credit or Employee Retention Tax Credit. Congress created it as part of their response to COVID-19 pandemic and it will remain available through 2021.
Eligibility for this credit is determined based on economic hardship caused by a pandemic. To be eligible, your business must have experienced at least 20% decline in gross receipts during any quarter from last year and been affected by forced closures or quarantines as well as being at risk of closing or being placed into shutdown status.
To claim this credit, file Form 941 with the IRS within four months of any quarter in which you claim it. When filing this form, be sure to include proof of economic hardship as well as details about all employees you employ as well as whether any allocable qualified sick leave or family leave wages qualify for this credit.
If you are seeking the COVID-19 payroll tax credit, it is crucial that you consult with a knowledgeable professional. There are numerous details involved and deadlines are quickly approaching; in addition, adjustments may need to be made within your business operations or procedures in order to meet requirements of these programs. A knowledgeable consultant can help determine your eligibility and ensure you claim maximum benefits available to you.
Calculation
Payroll taxes are withheld from employees’ wages and deposited regularly into government programs as payroll taxes. The amount withheld depends on an employee’s income level and tax bracket minus pretax deductions, with withholding rates adjusted annually by the IRS. Employers are responsible for collecting and depositing payroll taxes with the IRS providing exemptions and credits where needed; due to COVID-19 pandemic Congress has passed several payroll tax relief provisions including credits and deferral options that provide relief for small businesses.
The IRS defines a qualifying small business as any employer employing no more than 100 full-time and part-time workers for both the current year and previous years combined. Employers experiencing significant revenue decline or closure may qualify for a payroll tax credit equal to 50% of “qualified wages”, up to $10,000 per quarter; this credit offsets federal employment tax deposits or payments and any excess credited back to taxpayers.
Employers that qualify can use IRS Form 8974PDF to calculate and claim their credits on Form 941 for any applicable quarter. They must reconcile reduced federal employment tax deposits against credits on page one of Form 941 before reporting any resulting advance refunds on pages 2 and 3.
Calculating payroll taxes can be complex for smaller companies without access to an automated system, so the IRS provides both a wage bracket method and percentage method calculator on its website to assist with this calculation process. While the former uses tables to determine withholding for employees while the latter takes into account various factors like marital status, filing status and additional allowances listed on W-4 forms.
Failure to Deposit Penalty (TFRP). Any company or individual responsible for collecting and depositing withheld income and employment taxes who willfully fail to do so are subject to this penalty, including owners, officers, directors or shareholders responsible for managing funds on behalf of their businesses as well as anyone having control over them.