On March 27th, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was passed and signed into law by President Donald Trump. The act is intended to provide fast and direct economic assistance for American workers, families and small businesses affected by the public health and economic impacts of the COVID-19 pandemic.
As part of its overall relief package, Sections 2301 and 2302 of the CARES Act lay out provisions to help employers through any COVID-related economic hardship by providing payroll tax relief – this includes employee retention tax credits and deferring employer Social Security tax payments. These provisions are intended to encourage employers to continue paying wages to their employees.
Employee Retention Credits
The CARES Act provides quarterly refundable payroll tax credits against an employer’s Social Security tax obligations, with a maximum of $5,000 credit on each employee’s paid “qualified wages.” These wages are intended to encourage employers to keep their employees on their payrolls; however, there are important qualifications and restrictions regarding these credits.
Primarily, an employer must be continuing their business or trade in 2020. Additionally, an employer must be able to prove one or both of the following regarding COVID-19 economic hardships:
- The employer’s business operations were either suspended or halted completely as a result of governmental orders related to COVID-19.
- The employer’s gross receipts for the quarter were less than 50% of gross receipts for the same quarter in 2019. If this is the case, employers remain eligible for the credits unless, in another 2020 quarter, their gross receipts exceed 80% of those for the corresponding 2019 quarter.
These retention credits are the equivalent of 50% of “qualified wages” an employer pays in a calendar quarter, with a $10,000 cap. These credits are available from March 13 to December 31, 2020.
Employer Payroll Tax Deferral
Employers – including self-employed taxpayers – may defer paying the employer portion of certain payroll taxes through December 31, 2020. In lieu of paying these taxes in 2020, they will be due in two installments – one at the end of 2021, and one at the end of 2022.
The following taxes can be deferred:
- The 6.2% employer portion of the Social Security (OASDI) payroll tax
- The employer and employee representative portion of Railroad Retirement taxes (attributable to the employer 6.2% Social Security (OASDI) rate).
However, this relief is not available in certain circumstances, including if the employer has had debt forgiveness under the CARES Act for certain loans under the Small Business Act as modified by the CARES Act. These loans are generally available to employers with less than 500 employees and can be used to satisfy two months of payroll, benefits, rent, and interest on pre-existing debt.
If a taxpayer is self-employed, this deferral applies to 50% of the Self-Employment Contributions Act tax liability, including any related estimated tax liability.
If you have any questions concerning these provisions, do not hesitate to contact Daryl J. Sidle at 410-385-8077 or James E. Baker at 410-385-8122.