Refundable Payroll Tax Credits and Delayed Payments Under COVID-19 Relief Legislation

BOSTON – Under the recently enacted Families First Coronavirus Response Act (the “FFCRA”) and Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), employers are granted refundable credits against their “employer-side” Social Security taxes for (a) wages paid to employees taking emergency sick leave or Family and Medical Leave Act (“FMLA”) leave because of the COVID-19 pandemic, and (b) a portion of wages paid to all employees if the employer is specially impacted by the COVID-19 pandemic. Additionally, all employers may delay the deposit of most of their 2020 employer-side Social Security taxes for up to 1 ½ to 2 ½ years.

“Employer-Side” Social Security Taxes

Keep in mind that FICA taxes are actually 4 different taxes, imposed on wages paid by an employer to an employee. There are 2 Social Security taxes, each imposed on the first $136,800 of wages paid in 2020: (a) 6.2% on the employer, and (b) 6.2% on the employee. There are also 2 Medicare taxes: (b) 1.45% on the employer, and (b) up to 2.85% on the employee. The taxes imposed on the employer are often called the “employer-side,” and those imposed on the employee the “employee-side.” The refundable credits offered by the FFCRA and CARES Act are for employer-side Social Security taxes. With one exception described below regarding employer-side Medicare taxes, neither Medicare taxes nor employee-side Social Security taxes are impacted by the legislation.

Tax Credit for Wages Paid for Emergency Sick Leave and FMLA Leave

The FFCRA temporarily expanded paid sick leave and FMLA leave for certain employees who are unable to work (or telework) between April 1, 2020 and December 31, 2020 because of the COVID-19 pandemic. Specifically:

• An employee who (a) is subject to a federal, state, or local quarantine or isolation order, (b) has been advised by a health care provider to self-quarantine, or (c) is experiencing COVID-19 symptoms and is seeking a medical diagnosis, is entitled to up to 80 hours of paid sick leave at 100% of the employee’s regular rate of pay, up to $511 per day and $5,110 in the aggregate.

• An employee who (a) is caring for an individual subject to a quarantine or isolation order or self-quarantine advisory, or (b) is experiencing any other substantially similar condition specified by the U.S. Department of Health and Human Services, is entitled to up to 80 hours of paid sick leave at two-thirds of the employee’s regular rate of pay, up to $200 per day and $2,000 in the aggregate.

• An employee who is caring for his or her child whose school or place of care is closed (or childcare provider is unavailable) due to COVID-19 related reasons is entitled to up to 80 hours of paid sick leave and up to 10 weeks of paid family and medical leave at two-thirds of the employee’s regular rate of pay, up to $200 per day and $12,000 in the aggregate. (Employers of fewer than 500 employers whose business is threatened by the pandemic are exempted from the FMLA leave requirement).

The FFCRA effectively indemnifies the employer for the cost of providing such emergency sick leave and FMLA leave through refundable credits against employer-side Social Security taxes:

• Wages paid for emergency sick leave and FMLA leave are themselves exempt from employer-side Social Security taxes.

• The employers gets a credit against employer-side Social Security taxes due on other wages paid equal to the wages paid for emergency sick leave and FMLA leave.

• The credit is increased by any employer-side Medicare taxes due for emergency sick leave and FMLA leave wages.

• Any excess of the credit over the employer’s actual liability for employer-side Social Security taxes is refundable, in cash, to the employer.

“Employee Retention Credit” for Employers Specially Impacted by the COVID-19 Pandemic

Under the CARES Act, two types of employers receive a refundable “employee retention credit” against employer-side Social Security taxes equal to 50% of wages paid to each employee, up to $10,000 per employee (i.e., the maximum credit is $5,000 of wages paid to each employee).

Any employer whose business is fully or partially suspended by a government order limiting commerce, travel, or group meetings due to COVID-19 may receive the credit for wages paid during such suspension.

Any employer whose gross receipts for a calendar quarter are less than 50% of gross receipts for the same calendar quarter in the prior year may receive the credit for wages paid beginning with that quarter and ending with the quarter following the first quarter in which gross receipts exceed 80% of the employer’s gross receipts for the same calendar quarter in the prior year.

As with the FFCRA credits, any excess of the CARES Act employee retention credits over the employer’s actual liability for employer-side Social Security taxes is refundable, in cash, to the employer.

There are several provisions to prevent abuse or double-dipping with other benefits offered under the FFCRA and CARES Act. Creditable wages cannot exceed what an employee would have been paid for similar work in the prior 30 days. Employees cannot be double counted. Wages for emergency sick leave and FMLA leave that are creditable under the FFCRA, or wages creditable under certain other provisions of the Internal Revenue Code, are not also creditable under the CARES Act. And any employer receiving a forgivable loan under the CARES Act’s Paycheck Protection Program is not also eligible for the employee retention credit.

How to Claim the Credit or Refund

The IRS has made it amazingly easy to claim the credits offered under the FFCRA or CARES Act, or monetize any resulting refund. Of course, the credits can be claimed on the employer’s quarterly payroll tax return (Form 941). But the employer need not be so patient until the end of the payroll tax quarter.

Instead, the employer is explicitly permitted to help itself by keeping, for its own account, other payroll taxes that would normally be deposited with the IRS, including income and FICA taxes withheld from employees, regardless of whether such wages are creditable. (This is unprecedented – pocketing withholding taxes for one’s own use is normally a felony!)

An employer can report payroll taxes kept for its own account, and even request a cash advance of an anticipated refund, on the brand-new Form 7200.

Further details and fine print available from the IRS:

Form 7200 and Instructions

FAQs re FFCRA Credits

FAQ re Employee Retention Credit

Deferral of Payroll Tax Deposits

Regardless of whether any wages are creditable under the FFCRA or CARES Act, employers and self-employed individuals may generally defer depositing any employer-side Social Security taxes, which were otherwise due between March 27, 2020 and December 31, 2020. Deferred amounts are due in two equal installments – 50% on December 31, 2021, and 50% on December 31, 2022. The length of this deferral obviously makes this a significant benefit, but, like the CARES Act employee retention credit, the deferral is not available to an employer receiving a forgivable loan under the CARES Act’s Paycheck Protection Program.

As always, this summary is for informational purposes only and is not tax or legal advice. Always consult a professional tax advisor for advice in light of the taxpayer’s particular circumstances.

For more information on the employer tax credits available under the FFCRA or CARES Act, please contact:

Christopher Bird
(617) 918-7086
CBird@BlaisTaxLaw.com

Travis Blais
(617) 918-7081
TBlais@BlaisTaxLaw.com