Congress responded to the COVID-19 pandemic by passing laws providing tax relief for employers, such as paid sick and family leave credits, an Employee Retention Credit (ERC), and payroll tax deferrals.
Employers should work closely with their advisors and third-party payroll providers in assessing eligibility, calculating benefits, and claiming them in order to make the best use of these programs.
Deferrals
Deferral is an accounting term that refers to postponing recognition of transactions until a later period. For example, your business might pay its insurance premiums in one lump sum several months in advance and then treat it as an expense over its coverage period. Deferrals may also take the form of payroll tax relief programs like COVID-19 pandemic initiatives that help defer their recognition in your general ledger.
Congress responded to the COVID-19 crisis by creating four payroll tax relief programs through legislation like the CARES Act and Families First Coronavirus Response Act (FFCRA) in spring 2020, followed by further modifications through Consolidated Appropriations Act passed late December 2020. These programs allow employers to defer paying the employer share of Social Security payroll taxes that would otherwise be deducted directly from employees’ paychecks.
Keep in mind that the CARES Act employer payroll tax deferral was neither a grant nor forgivable loan and must be repaid in 2022. If deferred payroll tax payments are not deposited by their due dates, the IRS will impose a failure-to-deposit penalty of 50 percent of all deferred payroll tax payments due from when originally due; so be sure to factor this into your year-end tax planning strategy.
Taxpayers should carefully consider their accounting method — cash or accrual — when attempting to assess how deferring payment impacts them. Taxpayers who operate under an accrual-basis may be able to speed up access to funds by using Qualified Leave Credits and Employee Retention Credits that have accrued since January as offset deposits for initial quarter deposits if these credits become available prior to March 1.
As you prepare to meet the final payroll tax relief deadline, it is crucial that you consult with a Plante Moran advisor in order to take full advantage of all potential benefits and avoid potential traps. We can assist in understanding how CARES Act deferral could affect your business as well as how to repay any deferred payroll tax deposits.
Credits
Payroll tax credits help businesses reduce the payroll taxes they owe. These taxes apply both to employees and employers and cover income, Social Security/Medicare Contribution Act taxes (or FICA taxes), federal unemployment tax, etc. For small businesses in particular, payroll tax credits can significantly decrease or even eliminate employer contributions towards these payroll taxes altogether.
Congress responded to the COVID-19 pandemic by passing several laws in 2020 – such as the Coronavirus Aid, Relief, and Economic Security Act; Families First Coronavirus Relief Act; Consolidated Appropriations Act 2021 and Consolidated Appropriations Act of 2021 – that provided employers tax breaks designed to encourage them to provide paid sick/family leave as well as retain staff during this pandemic. These tax break provisions known as leave credits and Employee Retention Credit (ERC) could result in around $237.8 billion foregone revenue over FYs 2021-2022 according to Center for Budget and Policy Priorities estimates.
Law defines an Employer Responsibility Credit or ERC as a deduction against payroll taxes for qualified wages paid or incurred by an employer as compensation for his portion of employment tax imposed on those wages. An employer can claim this credit by reducing its scheduled deposit of federal employment tax deposits – comprising federal income tax withheld from employees, employee’s share of Social Security and Medicare taxes paid by themselves as employees, as well as employer contributions toward Social Security and Medicare taxes paid directly by employers – by an amount estimated as their anticipated ERC credit amount.
When possible, eligible small and midsize businesses should obtain access to payroll tax relief programs through reduced upcoming deposits instead of filing an advance refund request – this practice is encouraged in Form 941 instructions as it gives employers immediate access to cash.
If the estimated credit for an employer exceeds their reduction in employment tax deposits, the excess will be returned back to them; however, the credit cannot be applied towards their liability in the same quarter it was reduced and cannot carry forward to future periods.
Aggregation Rules
Even with access to numerous payroll tax relief incentives, many businesses still find it challenging to maintain sufficient cash flow. Furthermore, rules governing these incentives may be complicated and interdependent.
Example of the Change: Deferral Provision for Employer Social Security Taxes allowed employers to temporarily defer an unlimited amount of employer Social Security taxes paid between September 1, 2020, and December 31st of that year; those taxes must then be repaid through withholdings on employees’ paychecks in 2021. In addition, Employee Retention Credit (“ERC”) provided many eligible employers with a refundable payroll tax credit for wages paid during 2020-2021 that was eligible for ERC; to claim this credit an employer must qualify as Eligible Employer while filing Form 941X (Quarterly Federal Payroll Tax Return) after each quarter when eligible employers filed Form 941X quarterly Federal Payroll Tax Return to claim this credit.
Figuring out whether an employer qualifies as eligible can be difficult due to differing eligibility requirements among incentive programs and their respective affiliation and aggregation rules in the code. For instance, eligibility tests vary between PPP and ERC programs and various affiliation rules may affect whether an employer meets requirements to participate. Identifying eligible employers for each incentive program can often be confusing – thus leading to uncertainty as to when an employer would qualify as an eligible employer under each program.
The IRS has provided guidance regarding these concepts. For instance, they’ve stated that common-law employers can retain withholding amounts they would normally collect from multiple clients on one quarterly Form 941 filing; similarly, an affiliated service group with another entity may aggregate payroll tax filings and report them all as one Form 941X filing for all entities affiliated.
But these complex rules remain unfamiliar and difficult to interpret for business owners trying to take advantage of these programs. This alert provides clarity of these various rules, including their interaction and whether one program can preclude or limit another program’s usage. Furthermore, it includes examples as well as a comparison table outlining each incentive’s main features.
Reporting
No matter if your company is small or large, its payroll taxes must be properly recorded and managed. These include employee withholdings (based on Form W-4 information reported to state and local tax withholding certificates or benefit selection forms), FICA taxes (Social Security and Medicare contributions) as well as employer matching payments deposited directly by you or paid through payroll providers. Furthermore, deposits of these amounts should also be recorded and made promptly.
As the coronavirus outbreak progresses, businesses may qualify for various payroll tax relief programs – however these can be difficult to navigate and must be carefully assessed against your organization’s impact.
Hire an accountant or tax professional as soon as possible in order to meet all payroll tax obligations, including deferrals and credits. An expert accountant or tax professional will help determine eligibility for relief measures, calculate amounts due, prepare IRS forms for reporting them and prepare reports as necessary.
Eligible employers can claim the Employee Retention Credit (ERC) either in terms of reduced federal employment tax deposits or advance credits. When claimed using advance credits, first apply the credit toward offsetting any tax liability (such as Social Security deferral), before being available for claim on IRS Form 7200 by eligible employers.
COVID-19 related reporting and accounting issues continue to plague organizations. For example, companies must keep tabs on whether they’ve passed the 80% gross receipts test for each quarter in order to meet relief criteria; this requires comparing current quarterly revenue with that from three months ago and examining whether overall revenue has dropped below this threshold.
Tracking any government orders to suspend operations is also vital, including both complete suspension of business activities and partial shutdowns imposed by government bodies. Monitoring this activity is especially necessary since governments may eventually reverse these orders and reopen businesses, potentially leading to the return of any payroll tax credits that had gone unused.