Previous PayDay’s authored by AccuPay during the past week provided information about the Families First (FFCRA) legislation regarding employers with fewer than 500 employees who are required to offer sick/family leave time to certain employees, and SBA loan terms/concepts and SBA loan requirements. All of these recent PayDay’s about FFCRA and CARES Act provisions, as they impact payroll/taxes, can be found at AccuPay’s website at our blog.
This PayDay will discuss 2 more payroll tax provisions of the CARES Act, namely the opportunity to postpone/defer the employer share of FICA taxes (generally, 6.2% of an employee’s wages) AND the more complex “employee retention credits.”
IF YOU HAVE APPLIED FOR AND RECEIVE ONE OF THE IMMENSELY POPULAR SBA/PAYCHECK PROTECTION PROGRAM (PPP) LOANS, you are NOT ELIGIBLE for either of the following 2 tax provisions.
DEFERRAL/POSTPONEMENT OF THE EMPLOYER SHARE OF FICA TAXES FOR 2020
This CARES Act provision is rather “straight forward”, and applies to employers of all sizes. An employer can “ELECT” to postpone/defer and later pay their “employer match” of the 6.2% FICA tax which is otherwise paid with every payroll now, included in your IRS Form 941 federal tax deposit. If any employer elects to defer/postpone their employer share of FICA taxes, for payrolls paid after March 27, 2020 through December 31, 2020, they will OWE this money to the IRS in 2 equal installments due December 31, 2021 and 2022. These are essentially short-term zero interest rate “loans”, with no forgiveness provisions. An employer who has applied for and receives the SBA loan with forgiveness provisions is NOT ELIGIBLE for this tax deferral.
AccuPay is preparing a form today, in which our employer-clients can advise us IF they “elect” to postpone the payment of the employer share of FICA taxes for the balance of this year to be paid in equal 50% installments to the IRS at the end of 2021 and 2022.
IF you choose to postpone/defer payment of these taxes to the end of 2021 and 2022, it would seem prudent that an employer record each payroll’s postponed FICA tax “match” as both an expense and a liability. It would seem appropriate that the employer set up a brand new liability account in their general ledger to “capture” the FICA tax deferrals so they can monitor how much is owed to the IRS in postponed FICA tax expense. You may wish to ask your accountant about the accounting for your deferred FICA taxes, payroll by payroll.
EMPLOYEE RETENTION TAX CREDITS—–THE BASICS
Employers of all sizes can receive federal tax credits for 50% of each employee’s gross wages, up to $10,000 of wages ($5K per employee credit “cap”) for “qualifying wages’ paid March 13-December 31, 2020 IF the employer meets one of 2 eligibility “tests”, as follows:
An employer whose operations have been partially or fully suspended due to a government “shut-down” order, during any day of each calendar quarter in 2020, is eligible IF they have not received the small employer SBA loan with loan forgiveness provisions; OR
An employer whose gross receipts have decreased by greater than 50% during a quarter in 2020 compared to the same quarter in 2019 also qualifies for the employee retention credit IF they have not received the small employer SBA loan with loan forgiveness provisions.
NOTE—Wages subject to the credit are an employee’s gross wages PLUS their health insurance benefit paid by the employer.
THE EMPLOYER, OF ANY SIZE, MUST MEET ONE OF THE ABOVE 2 REQUIREMENTS TO BE ELIGIBLE FOR THE LOAN
An employer who meets one of the 2 requirements above for eligibility receives a tax credit equal to 50% of “qualified wages” for each employee, WITH the definition of “qualified wages” subject to the credit determined differently based on the number of employees which the employer has (employee counts are based on the ACA definition of FTE’s pursuant to Code Section 4980H regarding the Affordable Care Act (essentially, FTE’s are the total of all employees working 30 or more hours per week, on average, PLUS the total hours of employees working below 30 hours per week “converted” into 30 hour per week full-time equivalents). Here are “qualified wages” based on the number of FTE’s/employees an employer has:
More than 100 employees—-qualified wages for employers with more than 100 employees/FTE’s are wages paid to employees who perform NO SERVICES to the employer, during a calendar quarter. These larger employees may choose to pay wages to furloughed employees and not require they provide any services at all during a calendar quarter. Those wages paid by these employers of 100+ employees will be entitled to a federal tax credit against 941 IRS tax deposits equal to 50% of the first $10,000 of gross wages paid during the period March 13-December 31, 2020.
100 or less employees—-Employers with 100 or fewer employees/FTE’s will earn an employee retention tax credit equal to 50% of the gross wages paid to ALL EMPLOYEES, regardless of how much they worked during the calendar quarter. AGAIN, THIS IS NOT AVAILABLE FOR THOSE WHO RECEIVE AN SBA CARES ACT LOAN WITH FORGIVENESS PROVISIONS.
PERIOD OF TIME FOR EMPLOYEE RETENTION TAX CREDITS AND HOW TO CLAIM AND REPORT THE WAGES AND TAX CREDITS
An employer, who has not received a CARES Act SBA loan with forgiveness provisions, calculates their tax credits on qualifying wages paid after March 12, 2020 and through December 31, 2020, OR until they are no longer under a court shut-down order or their gross receipts reduction improves to certain levels (in other words, the employee retention tax credits are permitted as long as one of the 2 eligibility tests still exist). Wages which qualify for the retention tax credit and paid March 13-March 31, 2020 generate a tax credit which is reported/claimed on the second quarter, 2020 Form 941—The Q1, 2020 Form 941 will not contain any forms/boxes to claim the tax credit on—-reported on Q2, Form 941, which has not yet been prepared by the IRS.
Qualifying wages subject to the employee retention tax credit are calculated with each calendar quarter, starting with the first quarter in which an employer’s gross receipts have declined by greater than 50% as compared to the same quarter of 2019, and will continue to be “qualified wages” until the “quarter after” the quarter in which the employer’s gross receipts are improved to greater than 80% of the same quarter in 2019. No employee retention credit can be claimed for wages paid after December 31, 2020.
The employee retention tax credits earned can be used to reduce an employer’s IRS Form 941 tax deposit, and any credits earned in excess of the 941 tax deposits can be claimed on the quarterly Form 941 and generate a refund for the excess of employee retention tax credits over all 941 taxes otherwise owed. The IRS has also issued a brand new Form 7200 which an employer with credits exceeding their 941 tax deposits (credits are more than the 941 tax deposits, which are “zeroed out”) can complete and fax to the IRS at 855-248-0552 to obtain an “advance credit” of the employee retention tax credit (No Form 7200 used UNLESS the employer wants to receive “advance tax credits” from the IRS—-will be “trued up/reconciled” on the quarterly Form 941.)
Remember that the employee tax credit can not exceed $5,000 per employee, and ends after the end of the calendar quarter when the employer no longer meets the “shut-down” or “reduced gross receipts” conditions to earn the retention tax credits.
OTHER CONSIDERATIONS AND OBSERVATIONS ABOUT THE EMPLOYEE RETENTION TAX CREDIT
This credit is available to non-profits as well as for profit employers.
Qualifying wages for the credit DO NOT include any mandated sick/leave wages per the FFCRA, since they already qualify for a 100% tax credit.
Employers under “common control” as defined in IRC Code Section 414 (m) will be considered as a single employer for purposes of their number of employees. So a group of employers with “common ownership”, operating under separate legal entities, must determine their number of employees on an aggregate basis, based on common ownership.
Form 7200 “to receive advances on the employee retention tax credit can be faxed to the IRS more than once during a calendar quarter.
Some employers, especially those with less than 100 employees (FTE’s—part-timers do not count as one FTE, but need to be converted into FTE’s based on hours worked per month, divided by 120)—–MAY CHOOSE to claim employee retention tax credits IF they exceed the allowable PPP loan forgiveness amount. This is a very complex, brand new calculation, which appears to potentially favor the ERC instead of the PPP for employers with below 100 employees whose wages are $10 or less per hour—However, IF an employer forgoes the PPP loan for the purpose of claiming the employee retention tax credits, they will not receive an upfront injection of SBA loan proceeds with which to pay payroll costs and rent/utilities/loan interest—-the saved monies from the tax credits will flow over a multi-month period and would seem to not be available IF the shut-down order is released and/or gross receipts during a calendar quarter exceed 80% of “normal gross receipts” when compared with the same quarter of 2019.
Our sense is that an employer would only forego the PPP loan for the employee retention credits IF their CPA/tax advisor/attorney would “do the math”, understand the law (not yet interpreted thoroughly), and advise them accordingly. I have seen some “PPP vs ERC calculators” floating around which are intended to calculate an employer’s optimum cash flow savings, but AccuPay nor I would feel comfortable making that decision for a client—-overall, IF the employer qualifies for the SBA loan, that generally is the best choice IF THE EMPLOYER PLANS ON SPENDING MORE THAN 75% OF THE SBA LOAN PROCEEDS ON PAYROLL COSTS DURING THE FIRST 8 WEEK PERIOD AFTER GETTING THE SBA LOAN PROCEEDS.
A FEW USEFUL LINKS FOR MORE INFORMATION
The IRS has some FAQ’s and accompanying education about the employee retention tax credits at their coronavirus website at IRS. gov