Overview of Payroll Tax Relief Enacted to Help Businesses Struggling in the Midst of the Coronavirus Pandemic

Congress recently passed legislation aimed at encouraging business owners to continue paying the wages and benefits of employees by providing payroll-related tax credits, loans, and other forms of necessary relief. If you own a business, the InSight Law team wants to ensure you are fully aware of the various programs and tax incentives available to help you during this difficult and unprecedented time.

Payroll Tax Relief for Businesses with Less than 500 Employees

There are now tax credits available to help business owners cover the expense of paid sick leave and paid family leave. There is also tax-free forgiveness for Paycheck Protection Program loans and other government-backed loans aimed at helping business owners cover payroll and operating expenses during the Coronavirus pandemic;

There is also a new payroll tax credit for qualifying wages paid during a time when the employer’s business was suspended or experienced a significant decline in revenue as a result of COVID-19. Fianlly, business owners now have the option to defer their portion of 2020 Social Security taxes that are not covered under the payroll tax credit.

Tax Credits for Paid Sick Leave and Family Leave

Employers with less than 500 employees are now legally obligated to provide paid leave related to COVID-19 for the remainder of 2020. However, to help offset the expense associated with paid sick leave, Congress allocated money for businesses to access refundable tax credits.

Sick Leave Credit

Employers may be eligible for a refundable tax credit to help offset wages paid to employees who take emergency sick leave related to the COVID-19 between April 1, 2020 and December 31, 2020. The Sick Leave Credit is designed to entirely offset the cost of sick leave benefits mandated by Congress. The new tax credit provides for maximum payments of $2,000 or $5,110 per employee, depending on the type of sick leave.

Family Leave Credit

In addition to sick leave, employers with less than 500 employees are required to provide paid expanded family and medical leave. However, those employers are also able to take advantage of a refundable tax credit referred to as the “Family Leave Credit.” This credit is available when an employee uses expanded family leave related to COVID-19 between April 1, 2020 and December 31, 2020. The Family Leave Credit will help offset the cost of family leave benefits mandated by Congress. The credit can be up to $12,000 if an employee takes leave for 12 weeks.

Forgivable Loans Available Through the Paycheck Protection Program Flexibility Act

The Paycheck Protection Program Flexibility Act (PPPFA) was recently passed in order to address some of the glaring flaws and problems identified with the original Paycheck Protection Program (one of the pillars of the $2.2 trillion CARES Act). The PPPFA eased the burdens placed on business owners who obtained a PPP loan. Businesses now only have to spend 60 percent of loan funds on maintaining payroll (e.g., salary, health insurance, leave, etc.). Before passage of the PPPFA, business owners had to allocate 75 percent of loan funds to those costs. In addition, businesses now have 24 weeks to spend PPP loan funds instead of just two months.

Loan Forgiveness

If you comply with the terms of the PPP loan, you may be able to apply for loan forgiveness of all or a portion of the loan principal, for the costs incurred or paid during the initial eight weeks of the loan to the extent such costs relate to payroll, mortgage interest, rent, or utilities. It is important to note that PPP loan forgiveness is in flux and the guidelines were recently updated by the SBA. To learn more about your eligibility for loan forgiveness, check out this page. 

If you are ineligible for forgiveness, a PPP loan will have a five-year repayment term and a 1 percent interest rate.

Employee Retention Tax Credit

Eligible employers are now allowed to take a quarterly employment tax credit. This is known as the “Payroll Tax Credit.” This means a business owner can obtain a credit for 50 percent of “qualified wages” paid to employees. Though, there is a cap of $10,000 per employee that was paid for the period March 12, 2020 through December 31, 2020. As a result, the maximum available credit to an employer is $5,000 per employee. The credit first offsets an eligible employer’s payroll taxes for the quarter and any remainder is refunded to the taxpayer.

Eligibility for the Tax Credit

An employer is eligible for the Payroll Tax Credit only if they have been carrying on a trade or business in 2020 and was subject to one of the following “Coronavirus conditions” during the calendar quarter:

• the business was fully or partially suspended because of a governmental order related to the coronavirus; or
• the business experienced a year-over-year decline of more than 50% of gross receipts for a calendar quarter.

For employers who take the credit because of a significant decline in gross receipts, the credit will continue to be available for all calendar quarters through December 31, 2020, up to and including the first quarter in which the company’s revenue increases to at least 80 percent of the gross receipts in the same calendar quarter of the prior year, according to a great article published by Morrison Foester.

Payroll Tax Deferral

There is a temporary moratorium on the payment of an employer’s share of Social Security taxes that would typically be required to be deposited on, or after, March 27, 2020 and before January 1, 2021. This is known as the “Payroll Tax Deferral.” However, it is important to note that deferred payments will need to eventually be paid and payments can be issued in two installments – 50 percent by December 31, 2021 and 50 percent by December 31, 2022. During the period of deferral, employers are not required to make normally required periodic tax deposits of the employer’s Social Security taxes.

Have Questions? Contact InSight Law Today

As you can see, there are an array of different programs, tax credits, and loans available to business owners, but eligibility depends on the type of relief. the size of your business, and other factors. If you have questions and need assistance in determining whether your business may be eligible for payroll tax relief, contact InSight Law today. We are here to help.