The federal government has introduced several forms of tax relief for small businesses in the 2020 calendar year. Most of these temporary changes stem from the Families First Coronavirus Response Act (FFCRA) and the Coronavirus, Aid, Relief and Economic Security Act (CARES Act), which jointly serve to help employers and employees survive the ongoing COVID-19 economic crisis.
These changes include a payroll tax deferral, three new business tax credits, and new federal tax filing and payment deadlines—options covered in detail below.
Paid Leave Tax Credits (the FFCRA)
As most employers already know, the FFCRA requires most small and midsize employers to provide limited paid leave for employees who can’t work due to the COVID-19 pandemic. Less well-known, perhaps, is that the Act also includes dollar-for-dollar tax credits available the businesses required to comply.
The FFCRA’s requirements and tax credits apply to most businesses with fewer than 500 employees. Small businesses with fewer than 50 employees, however, are eligible for an exemption from the childcare portion of the Act’s requirements (described below) if the expense would pose a demonstrable threat to the business’s ability to stay viable.
Credits for Required Paid Leave
The Act provides affected businesses with a 100% credit per employee for up to 10 days of paid sick leave related to COVID-19. If the employee is quarantined, has the virus, or shows symptoms of having the virus and is actively seeking a diagnosis, the business pays the employee’s regular wages for up to two weeks (80 hours) of paid sick leave. The tax credit reimburses this expense in full for up to $511 a day (up to $5,110 if the employee takes the full 10 days).
If the employee takes leave to care for someone else under similar COVID-19 related circumstances (quarantine, childcare in light of school closures, etc.), the tax credit covers two-thirds of the employee’s regular pay for up to 10 days (capped at $200 a day or $2,000 for the full 10 days).
An additional credit for child care is also available at two-thirds of the employee’s regular rate of pay (and beyond the two weeks of sick leave mentioned above). This credit applies to up to 10 weeks of additional leave taken under qualifying circumstances, and it caps at $200 a day or $10,000 if the employee takes leave for the full 10 weeks.
Recouping Your Costs
To promptly cover your costs for the paid leave requirements of the FFCRA, you’re allowed to retain the money for the paid leave from payroll taxes you would have deposited with the IRS (including federal income taxes and both your and your employee’s share of Social Security and Medicare taxes).
If it turns out that the payroll taxes you would have paid don’t cover the full cost of the paid leave you provided, you can request an accelerated refund from the IRS.
Deferred Payment of Payroll Taxes (the CARES Act)
The CARES Act allows employers to defer payment of the employer’s portion of social security taxes that would have been due between March 27, 2020, and December 31, 2020, and instead make those deposits in installments—half by the end of 2021 and half by the end of 2022.
No special election is required for businesses to defer their deposits and payments, and the IRS is in the process of revising the Employer’s Quarterly Federal Tax Return (Form 941) to reflect these changes.
This option is available to most employers, including self-employed individuals, but employers who have received a Paycheck Protection Program loan can only defer payments until they receive notice that their PPP loan has been forgiven.
Employee Retention Credit (CARES Act)
The employee retention credit is designed to help keep employees on the payroll, and, unlike the paid leave credits described above, it is available to most employers. The credit is 50% of up to $10,000 of qualified wages per employee for the entire year, and it’s available for wages paid after March 12, 2020 and before January 1, 2021.
To qualify for the employee retention credit, an employer’s operations must have been fully or partially suspended in 2020 because of a government order related to the COVID-19, or the employer must have experienced a 50% decline in gross receipts during the relevant quarter when compared to the same quarter from the previous year.
The government order has to be official (it can’t be a mere recommendation to close), but there’s no requirement for a business to demonstrate that a significant reduction in gross receipts was due to the effects of the COVID-19 pandemic. In that case, simply showing that a 50% reduction has occurred is enough to qualify for the employee retention credit.
Note that the employee retention credit is not available to government employers. Self-employed individuals are eligible for the credit with regard to wages paid to their employees but not their own.
The employee retention credit is also not available to employers who have received PPP loans, unless the employer paid back the loan by May 14, 2020—which isn’t an option, of course, for most businesses just now considering the employee retention credit.
Claiming the Employee Retention Credit
As with the paid leave credits described above, you can immediately claim the employee retention credit by keeping the equivalent funds from the payroll taxes you would have deposited with the IRS for that quarter. In cases where the payroll taxes retained won’t cover the entire credit needed, advance payments are possible by submitting IRS Form 7200.
What is the Current Tax Filing Deadline?
The IRS, for its part, has extended the federal tax filing and payment deadline to July 15, 2020, for all filers, and this new deadline also applies to business’s estimated quarterly tax payments. As a result, first-quarter estimated payments (originally due April 15) and second-quarter estimated payments (originally due June 15) can now be paid at the same time by the new July 15 deadline.
Lastly, the states keep their own timetables, but many states have moved their state-filing deadlines forward as well—to mid-July, in many cases, but the dates may vary from state to state. You can find a complete list of the current state filing deadlines here.