By Trüpp’s Compliance Team
As the economy reels from the fallout of the Coronavirus, the federal government has passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), to provide relief for struggling employers. This long and very complex law includes provisions to cover a variety of economic and industry needs. Here’s a breakdown of what employers need to know when determining which offering is best suited to their needs.
Employee Retention Credit
The Employee Retention Credit is a fully refundable tax credit for eligible employers that is equal to 50 percent of qualified wages (including allocable qualified health plan expenses) paid to employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account for each employee during this period is $10,000, equating to a maximum per employee credit of $5,000.
Employers, including tax-exempt organizations, are considered eligible if:
- Operations were fully or partially suspended due to a coronavirus shut-down order; or
- Gross receipts declined by more than 50 percent as compared to the same, prior-year quarter.
Determining qualified wages for eligible employers:
- Averaged more than 100 full-time employees in 2019: Qualified wages are the wages paid to an employee for time that the employee is not providing services due to one of the reasons above.
- Averaged less than 100 full-time employees in 2019: Qualified wages are the wages paid to any employee during any period of economic hardship described above.
How to Access the Tax Credit
The credit is allowed against the employer portion of social security taxes for all employee wages paid in the corresponding quarter when filing Form 941. Any excess over the employer’s share of social security taxes is treated as an overpayment and refunded to the employer after offsetting other tax liabilities on the employment tax return.
An eligible employer may fund qualified wages by:
- Accessing federal employment taxes, including those that the eligible employer already withheld, that are set aside for deposit with the IRS for other wage payments made during the same quarter as the qualified wages; or
- If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the eligible employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
The Employee Retention Credit and Other Relief Programs
- The amount of qualified wages for which an employer may claim the Employee Retention Credit cannot include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
- An eligible employer may not receive the Employee Retention Credit if the employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act.
Deferral of Employer’s Share of Social Security Payroll Taxes
Employers can defer payment of the employer’s share of the social security tax they are otherwise responsible for paying (generally a 6.2% tax on wages or earned income) for the 2020 tax year. The deferred employment tax can be paid over the two following tax years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Paycheck Protection Program
Many small businesses and nonprofits with no more than 500 employees can apply for the Paycheck Protection Program, which is a loan available through the U.S. Small Business Administration (SBA). Eligible borrowers can be approved for a loan through their bank equaling the lesser of $10 million or 2.5 times an employer’s average monthly eligible payroll costs in 2019.
- Eligible borrowers must make a good faith certification that the loan is necessary due to the uncertainty of current economic conditions caused by COVID-19.
- Allowable uses of loan proceeds include payroll expenses, mortgage, rent, and utility payments.
- Eligible payroll costs do not include compensation above $100,000 in wages, social security, and Medicare payroll taxes and qualified sick / family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.
- Eligible borrowers are not allowed to receive duplicative funds for the same uses from another SBA program.
- For the portion of the loan that is not forgiven, the maximum interest rate is one percent. The maximum term to pay off the loan was extended from 2 years to 5 years under the Paycheck Protection Program Flexibility Act (PPPFA), signed into law on June 05, 2020.
PPP Loan Forgiveness
Borrowers who meet certain requirements are eligible for loan forgiveness under the Paycheck Protection Program. PPPFA lowered the payroll requirement to qualify for loan forgiveness from 75% to 60% of used for payroll costs. The forgiveness equals the amount spent for payroll costs, interest on mortgages, rent, and utilities by the eligible borrower during the twenty-four-week period following the origination date of the loan and prior to the end of the covered loan period.
The amount of loan forgiveness is reduced if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. However, reductions in employment or wages will not reduce the amount of loan forgiveness if the borrower eliminates the reduction in employees or wages by December 31, 2020. Borrowers can also avoid loan forgiveness reductions if they document the inability to rehire a previously terminated individual and a subsequent inability to hire a similarly qualified individual. The PPPFA also introduced an exception that allows borrowers to document their reduced business activity as a result of compliance with federal requirements or guidance related to COVID-19.
Economic Injury Disaster Relief (EIDL) Loans and Grants
EIDLs are lower interest loans of up to $2 million, with principal and interest deferment at the administrator’s discretion, that are available to pay for payroll and other operating expenses. Small businesses, with 500 or fewer employees, and many non-profits of any size may be eligible for EIDL loans.
These grants provide an emergency advance of up to $10,000 to small businesses and private non-profits harmed by COVID-19 within three days of applying for an EIDL. To access the advance, eligible borrowers first apply for an EIDL and then request the advance. The advance does not need to be repaid but is subtracted from the amount of debt forgiven under the Paycheck Protection Program, if applicable.
The EIDL grant may be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent, and mortgage payments.
EIDL Loans and the Paycheck Protection Program
If an eligible borrower receives an EIDL loan or grant, they may also apply for a Paycheck Protection Program loan. However, as mentioned above, any advance amount provided under the EIDL grant will be subtracted from the amount forgiven under the Paycheck Protection Program. Also, eligible borrowers cannot use an EIDL loan for the same purpose as the Paycheck Protection Program loan. This means that the EIDL loan will need to be used for different employees or during a different period than the eight-week period under the Paycheck Protection Program.
NOTE: As of June 11, 2020, the SBA has a notice on their website that says they are only able to accept new applications for the Economic Injury Disaster Loan (EIDL)-COVID-19 related assistance program (including EIDL Advances) for agricultural businesses.