Unemployment is nearing Depression-era levels. In response, Congress has enacted several new tax incentives that encourage employers to keep their employees on the job or pay them while they’re not working.
Paycheck Protection Program Loans (PPP loans for short) are the best known of these new measures. The Small Business Administration administers this new loan program for small businesses.
Businesses with less than 500 employees can borrow 2.5 times their average monthly payroll costs for 2019 up to $10 million. For example, if your 2019 monthly payroll was $10,000, you can borrow $25,000.
These are two-year loans with a one percent interest rate. Payments don’t begin for six months.
Applications for this loan must go through a bank or other financial institution participating in the program. Funding for PPP loans is limited.
PPP Loans have a unique feature that makes them very popular: loan forgiveness. If complex rules are followed, all or part of the loan need not be paid back. Moreover, the forgiven loan amount is tax-free. The forgiveness-payback rules are why over two million small business owners have already applied for PPP loans.
To obtain loan forgiveness, they must spend the PPP loan on payroll costs, mortgage interest, utilities and rent during the eight weeks after the money is received. The employer must maintain the same employee staffing and salary levels as in 2019.
Forgiveness is reduced if full-time headcount declines, or if salaries and wages decrease. You can rehire fired or furloughed employees to satisfy these requirements.
For more information, see SBA Paycheck Protection Program web page.
Employee retention tax credit
The employee retention credit is an alternative to a PPP loan. You can’t get both.
The employee retention credit is a tax credit, not a loan. You don’t have to apply to a lender to get it.
Any business with employees can get the credit if:
- Its operations were wholly or partly suspended during any calendar quarter in 2020 due to a government COVID-19-related order, or
- It experienced a 50 percent or greater decline in gross receipts during any 2020 calendar quarter—the fall need not have been due to the pandemic.
There is no limit on the number of employees as with PPP loans. Nevertheless, employers with more than 100 full-time employees, can only claim the credit for wages paid to employees for time they do not work due to pandemic-related disruption.
The credit amount is 50 percent of the wages (plus health insurance) paid to employees during the pandemic disruption. But the credit is capped at $5,000 per employee.
Employers can claim the credit during 2020 by reducing their required deposits of employer Social Security payroll taxes. They can also get an advance payment of the credit from the IRS by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The employee retention credit is a refundable credit. This classification means that an employer may collect the full amount from the IRS even if it reduces its tax liability below zero.
For more information, see the Employee Retention Credit under the CARES Act FAQ page prepared by the IRS.
Delaying 2020 Social Security tax payments
Under normal rules, employers are required to pay half their employees’ Social Security taxes. This tax is a 6.2 percent tax up to an annual wage ceiling ($137,700 in 2020). Employers must ordinarily deposit these taxes with the IRS at least four times per year.
For 2020 only, employers are permitted to defer 50 percent of their employer Social Security taxes until the end of 2021 and 2022. If an employer chooses to do this, it must pay 25 percent of the deferred amount by December 31, 2021, and 25 percent by December 31, 2022.
An employer that receives a PPP loan is not eligible for the Social Security tax deferral once it receives notice from a lender that the loan is forgiven.
Sick and family leave tax credits
The Family First Coronavirus Response Act, signed into law on March 18, 2020, requires that employers with less than 500 employees provide them with paid sick leave and family leave if the pandemic impacts them. It also includes new tax credits to help employers pay for the leave.
Sick leave: Starting April 2, 2020, and continuing through December 31, 2020, employers must provide up to ten days of paid sick leave to employees impacted by the coronavirus pandemic.
Family leave: Employers must also provide eligible employees with up to 12 weeks of paid family and medical leave. Such leave must be given if an employee is unable to work or telework due to the need to care for the employee’s child under 18 years of age.
Tax credits: Employers can get a special tax credit to reimburse them for 100 percent of the costs incurred to provide such sick leave and family leave. The credits also cover the cost of paying for employee health insurance coverage during the leave period.
Obtaining the credit: Employers may reduce their 2020 employee payroll tax payments to cover the cost of the credits. All payroll taxes may be reduced: income taxes withheld from employee pay, and both the employer and employee shares of Social Security and Medicare taxes.
If there are not sufficient payroll taxes to cover the cost of COVID-19 sick leave or emergency leave paid, employers can file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less.
Also, such sick leave and emergency leave payments don’t count as wages for Social Security and Medicare tax purposes. This means that employers who make such payments don’t have to increase their share of Social Security and Medicare payroll taxes.
For more information, see the COVID-19 related tax credits FAQs prepared by the IRS.