Payroll and Self-employment Tax Relief in the Wake of COVID-19
April 1, 2020
Recent legislation has provided several forms of payroll tax relief for the self-employed, businesses, and nonprofits due to the impact of the coronavirus. Two key pieces of legislation providing this relief are the Families First Coronavirus Response Act (FFCRA) signed into law on March 18, 2020, and the Coronavirus Aid, Relief and Economic Security Act (CARES Act) signed into law on March 27, 2020.
Tax Credits for paid sick and family medical leave
The FFCRA payroll tax credits were addressed in a previous JPS article. These credits are designed to fully reimburse businesses that are required to pay emergency sick leave and emergency paid family and medical leave due to the virus. In addition, employers are not subject to the Social Security tax (employer match) on wages paid under this act. Eligible businesses are those with fewer than 500 employees, including nonprofits.
Self-employed business owners are also eligible for equivalent credits via a reduction to their self-employment tax. Since there is no employer to pay these leave benefits if they suffer qualifying coronavirus-related consequences, the credit is based on what they would have been eligible for had they been employed. This is referred to as the “qualified sick leave equivalent.” Self-employed individuals can reduce their estimated tax payments and claim the full credit as part of their individual tax return.
The CARES Act made some modifications to these credits, and the IRS has recently provided some additional guidance. Businesses can obtain immediate dollar-for-dollar tax offset against payroll taxes simply by reducing the amount they are otherwise required to remit to the IRS. If those amounts are insufficient to fully recover the costs paid out under the FFCRA, businesses can request a refund using Form 7200. A draft of this form has been issued and can be viewed here. The IRS has committed to refunding these amounts as quickly as possible.
For additional information on this credit, the IRS has provided this webpage.
Employee retention credit
The CARES Act provides certain employers with a tax credit designed to compensate them for retaining employees during this pandemic.
Employers conducting business during 2020 and satisfying one of two requirements are eligible for the credit:
- Business operations are partially or fully suspended due to government orders limiting their activity, including travel and group meetings; or
- Revenues during any calendar quarter were reduced by at least 50% as compared to the same time period a year ago. Once revenues reach 80% year-over-year, the company is no longer eligible.
The credit is equal to 50% of the first $10,000 in wages (plus the value of health plan benefits) expended for each employee. This means that the credit could be as high as $5,000 per employee.
For employers with more than 100 employees, only wages being paid to those who are not actually working for the employer due to COVID-19 reasons are eligible. For smaller employers, all wages are considered.
It’s important to note that this credit is not available if the company has received an SBA Paycheck Protection Program loan.
Deferral of employment tax payments
The CARES Act allows businesses and self-employed individuals to postpone the remittance of the employer share of Social Security taxes. Generally, employers must remit these taxes, representing 6.2% of taxable wages, shortly after each payroll. Self-employed individuals typically remit this tax, representing 6.2% of their net taxable income, as part of their estimated income taxes or with their individual income tax return.
These taxes will be treated as being paid timely if one-half of them are submitted by December 31, 2021, and the other half by December 31, 2022. This serves to provide the business with additional cash for those periods.
Note that businesses and self-employed individuals that receive a loan under the SBA Paycheck Protection Program and which is forgiven are not eligible for this payroll tax deferral.
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