Employers are Cautioned to Avoid Coronavirus Relief Package Missteps
Recent federal relief packages stemming from the coronavirus pandemic provide significant tax savings for employers, with businesses of all sizes benefitting. But Pete Isberg, vice president of government affairs at ADP, cautions that employers need to be aware of some pitfalls to avoid in applying for the relief packages, such as the potential to end up with more debt than before the coronavirus crisis and often not being able to apply to more than one program at a time.
The Coronavirus Aid, Relief and Economic Security Act (CARES), which was enacted on March 27, and the Families First Coronavirus Response Act (FFCRA), which was signed into law on March 18, offer several tax credits, tax payment deferrals, forgivable loans and other provisions which could aid businesses in keeping their workforces intact amid this crisis. However, employers need to do what’s right for their individual company, said Isberg.
“Guidance is still coming out at lightning speed,” said Isberg, who noted that since there are so many changes to these relief packages from the federal government “regulations and guidance will continue to evolve over the coming weeks.”
The option to defer payment of the 6.2-percent employer Social Security tax under the CARES Act from March 27 through Dec. 31, 2020, is available to all employers but, according to Isberg, it is probably best for large employers. “We did hear from many of our larger clients who don’t qualify for the CARES Act’s Paycheck Protection Program (PPP) who are looking at this as their best option,” he said. PPP was created to assist small businesses with loan assistance administered by the Small Business Administration (SBA) to keep workers on their payroll. Businesses and nonprofits with fewer than 500 employees are eligible for the loan program through June 30, 2020. Payroll costs under the PPP consist of wages, commissions and other compensation, as well as health care costs including insurance premiums, state and local employer taxes and other specified costs.
If an employer wanted to take the CARES Act’s deferral, taxes would be paid in equal amounts over two years with payments due on Dec. 31, 2021, and on Dec. 31, 2022. “That seems simple enough and helpful, but it should be considered in relation to some of the alternatives …,” he said.
Small businesses should keep careful track of any amounts deferred. According to Isberg, “they could be accumulating very daunting tax debts over the next nine months.” Employers with 100 or fewer employees qualify to apply for the CARES Act’s deferral of employer Social Security taxes, but they cannot apply for both the deferral and the PPP, only one, he said.
Other Help Available
While the Social Security tax deferral route is good for some employers, Isberg notes some other credits available during the COVID-19 crisis also make the deferral less relevant. In addition to the PPP, other tax credit and loan programs can also help. According to Isberg, the following may offer even greater benefits than a deferral:
- New Paid Sick/Family Leave Credit (FFCRA)
- New Employee Retention Credit (CARES)
- Small Business Research Credit (Internal Revenue Code)
- Qualified Veterans (Internal Revenue Code)
- Employer Credit for Paid Family and Medical Leave (Internal Revenue Code)
Paid Family and Medical Leave
Though similar to the 2017 Tax Cuts and Jobs Act’s (TCJA) Family and Medical Leave Credits, the FFCRA stipulates that employers with fewer than 500 employees are now generally required to offer paid family leave and paid sick leave to employees who are unable to work (such as by telecommuting) and who meet specified conditions related to COVID-19. Employers can claim those credits as of April 1 until Dec. 31, 2020.
There are restrictions to make sure employers are not receiving double benefits, however, Isberg said. Businesses can also request an advance payment of those credits, which is likely the best option for those who have ceased operations, he added.
Employee Retention Credit
Under the CARES Act, the Employee Retention Credit is mainly for those employers whose operations are either fully or partially suspended due to COVID-19. However, employers who receive the credit are not eligible for the PPP. As it stands, private sector employers, may claim a refundable tax credit against employer Social Security tax that is equal to half, or up to $10,000, in wages per employee paid after March 12, 2020, and before Jan. 1, 2021.
The credit applies to wages paid to employees who provided no services during the shut-down in the case of employers with more than 100 employees, and to all wages for employees working for employers with 100 or fewer employees. Nonprofit organizations can also take this credit, but not government entities.
Isberg notes that IRS Form 941, Employers Quarterly Tax Form, which will likely be used very heavily in evaluating these credits, will likely double in size to accommodate and reconcile all the new programs. According to the IRS, “If you paid any qualified wages between March 13, 2020, and March 31, 2020, inclusive, you will include 50 percent of those wages together with 50 percent of any qualified wages paid during the second quarter of 2020 on your second quarter Form 941, 941-SS or 941-PR to claim the employee retention credit.” They warn not to include the credit on the first quarter Form 941, 941-SS or 941-PR.
To help employers navigate all of the federal coronavirus resources available, ADP has created an ADP Employer Preparedness Toolkit — Coronavirus Disease (COVID-19) and it also has an ADP Employment Tax Guide, with information grouped by state.