Deferral of Employment Tax Deposits and the Employee Retention Credit

The Paycheck Protection Program (PPP) has been dominating the news and keeping us very busy over the last four weeks. And even though the PPP is the most widely known and most powerful provision in the CARES Act, there’s a lot more in there than just that! The CARES Act also implemented two other important strategies that should not be forgotten or ignored. Following is a brief synopsis of the Deferral of Employment Tax Deposits and the Employee Retention Credit.

Deferral of Employment Tax Deposits

• Employers may defer the payments of the employer’s portion of Social Security taxes that would have been required to made between March 27, 2020 and December 31, 2020
• All employers generally qualify for the deferral
• This is a deferral program not a forgiveness program:
  – 50% of the amount deferred must be paid by December 31, 2021
  – The other 50% of the amount deferred must be paid by December 31, 2022
• For employers that received a loan under the PPP:
  – The deferral period ends on the date that the loan is formally forgiven by the bank
  – After loan is forgiven, PPP recipients are required to resume normal employer payroll tax deposits
• Other miscellaneous tidbits:
  – Self-employed individuals are permitted to defer 50% of the Social Security tax on net earnings from self-employment income over the same time-frame
  – No election is needed to take advantage of the deferral process
  – Employers can stop making deposits and payments immediately
  – The IRS will revise the payroll tax form 941 and issue further guidance at a later date.

Employee Retention Credit

• Certain employers that operate a business during 2020 and retain employees despite experiencing economic hardship related to COVID-19 may receive a fully refundable credit
• Businesses are ineligible if they’ve received PPP loans
• In order to qualify for the credit:
  – Business operation must be fully or partially suspended as a result of a government order due to COVID-19 OR
  – Business remained open but during any quarter in 2020 gross receipts were less than 50% of what they were in 2019
• Amount of credit:
  – Based on “qualified wages” paid between March 13, 2020 and January 1, 2021
  – Credit equals 50% of first $10,000 paid to each employee (maximum credit per employee is $5,000)
  – Business is entitled to the credit each quarter in 2020 until gross receipts hit 80% of where they were in 2019
  – Credit is taken in the form of reduced payroll tax deposits or refundable credit when the quarterly Form 941s are filed
  – Employers can also receive advance funding of the credit by filing Form 7200
• “Qualified wages” depend on size of business:
  – 100 employees or more – credit is based only on the wages and certain health care costs paid to the employee while employee was not working
  – Less than 100 employees – credit is based on wages and certain health care costs paid to any employee during the two periods of economic hardship described above regardless of whether the employee is working or not.
  – “Qualified wages” per employee cannot exceed $10,000.