Payroll Tax Incentives Offered by the CARES Act and FFCRA May Offer Substantial Relief
While many small business owners are already aware of at least some of the relief offered by the Coronavirus Aid, Relief and Economic Stability Act (“CARES Act”), less media attention has been focused on other benefits of emergency legislation that may offer substantial relief to businessowners. In light of the exhaustion of funds available for the Paycheck Protection Program and certain other disaster loans, small business owners should look to the Employee Retention Credit from the CARES Act and the Payroll Credit for Required Sick Leave from the Families First Coronavirus Response Act (“FFCRA”) – which are not subject to the same potential funding shortfall – in order to weather economic issues caused by COVID-19 and related shutdowns.
What is the Payroll Credit for Required Sick Leave?
One of the first legislative responses to mandated shutdowns involved the creation of mandatory sick leave provisions that were, in effect, funded through payroll tax credits. The Emergency Paid Sick Leave Act, incorporated into the FFCRA, provides generally that employers of under 500 employees are required to pay sick leave to employees if they are unable to work (or telework) due to the following reasons:
- The employee is subject to governmental quarantine or isolation order related at COVID-19;
- The employee has been advised by a health care provider to self-quarantine due to COVID-19;
- The employee is experiencing symptoms of COVID-19 and is seeking medical diagnosis;
- The employee is caring for an individual subject to (1) or (2);
- The employee is caring for a son or daughter of such employee if the school or place of care of that child has been closed or child care is unavailable, as a result of COVID-19; or
- The employee is experiencing a substantially similar condition identified by the Secretary of Health and Human Services.
Full-time employees are entitled to paid sick leave of up to 80 hours under the FFCRA. Part-time employees are entitled to a percentage of that time based upon their average hours worked. The amount of paid sick leave is limited to either $511/day (if sick leave due to reasons (1) through (3) above) or $200/day (if sick leave due to reasons (4) through (6) above). Paid sick leave immediately terminates once the reason for such leave terminates. Obviously, provisions requiring paid sick leave would normally create a substantial financial burden for employers; however, the FFCRA provides additional provisions essentially transferring much, if not all, of the financial burden to the federal government.
In particular, section 7001 of the FFCRA provides a credit mechanism for employers required to pay sick leave pursuant to these provisions. An employer may qualify for a credit against payroll taxes for up to 100 percent of the “qualified sick leave wages” – i.e., payments to an employee for reasons described above – paid in that quarter. The credit is limited by the amount of sick leave required to be paid – i.e., either $511/day or $200/day – and is capped at a maximum of 10 days. Still, this credit may allow employers to pay needed employees up to $5,110 through completely refundable tax credits. To avoid a double benefit, any employment tax credit claimed by an employer under this section must be added to its taxable income.
What is the Employee Retention Credit?
Separate and apart from the Payroll Credit for Required Sick Leave, Congress authorized the Employee Retention Credit pursuant to Section 2301 of the CARES Act. While the former credit requires the payment of sick leave for those who cannot work as a result of COVID-19, the Employee Retention Credit incentivizes employers to retain employees if the employer has been forced to shut down or has been financially harmed as a result of COVID-19.
The Employee Retention Credit allows eligible employers to receive a credit of up to 50% of the qualified wages paid to each employee of such employer for such calendar quarter. For each employee, the credit is limited to the first $10,000 of wages paid. In other words, a maximum $5,000 credit is allowed for each employee. The credit is further limited to the amount of employment taxes – reduced by any credits pursuant to the Emergency Paid Sick Leave Act – paid by the employer for each quarter. If the amount of the credit exceeds the amount of employment taxes due, that amount is treated as an overpayment and shall be refunded.
Eligible employers are determined on a calendar quarter basis and include those employers that carried on a trade or business in 2020 for which either of the following conditions applied: (1) the operation of business was “fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus” or (2) for any calendar quarter beginning in 2020 or thereafter, gross receipts were less than 50 percent of the gross receipts for the same quarter of the prior year (“gross receipts test”). If an employer is eligible due to the gross receipts test, that employer continues to be eligible through the calendar quarter following where gross receipts first are more than 80 percent of the gross receipts for the same calendar quarter in the prior year. (For example, if gross receipts for the second quarter of 2020 are less than 50% of gross receipts for the second quarter of 2020 and gross receipts return to normal in the third quarter of 2020, the employer is eligible for the credit for the second and third quarters under the gross receipts test.)
Qualified wages are calculated differently for employers with less than 100 employees. For those with more than 100 employees, qualified wages include those wages paid to employees not providing services due to full or partial government suspensions resulting from COVID-19 or where the employer meets the requirements of the gross receipts test. On the other hand, for employers of less than 100 employees, qualified wages are determined based on the same reference period but may include wages paid when services are actually being provided by the employee. Qualified wages do not include wages that are considered “qualified sick leave wages” under the FFRCA and are limited to the amount of wages paid to the employee from the prior 30 days. As with the FFRCA, the CARES Act permits credits for allocable portions of healthcare expenses and limits double benefits. Importantly, the employee retention credits are not available to any employer receiving a loan under the Paycheck Protection Program.
What Does This Mean?
The Paycheck Protection Program was touted as a capital infusion for small businesses that were adversely affected by shutdowns related to COVID-19. But a comparative illustration shows that the aforementioned credit provisions may actually benefit an employer more vis-à-vis the Paycheck Protection Program. (Other employers may only qualify for these credit options for various reasons.) Consider the following 50-employee restaurant with 5 managerial employees earning $6,000/month ($72,000/year) and 45 other staff earning $2,000/month ($24,000/year):
|Paycheck Protection Program||Employee Retention Credit|
|Eligible Payroll/Month:||$ 120,000||Maximum Credit/Employee:||$ 5,000|
|Maximum Loan Amount*:||$ 300,000||Maximum Total Credit:||$ 250,000|
|Payroll-Related Forgiveness*:||$ 221,538||Payroll Tax Credit in Q1 2020:||$ 160,000|
|Payroll Tax Credit in Q2 2020:||$ 90,000|
|1) 50 total employees pre-shutdown (each receiving eligible wages).|
|2) 5 management-level employees earning $6,000/month.|
|3) 45 staff earning $2,000/month.|
|4) Shutdown occurred prior to April 1, 2020.|
|* Maximum loan amount equal to 250% of monthly payroll.|
|** Expected forgiveness based upon 8/52 of annual payroll.|
Stated differently, for employers with a large percentage of relatively low-paid employees, the maximum benefit available from the Paycheck Protection Program will be less than the Employee Retention Credits. Setting aside other considerations, if those employees earning more than $100,000/year are excluded, employee retention credits are preferable for those employers with average employee pay under $32,500.
While the credit provisions may not be the best solution for all businesses and may not provide the flexibility offered by the Paycheck Protection Program, it is important that business owners be aware of their benefits. If a loan administered under the Paycheck Protection Program is being sought, businesses should consider whether these benefits might be inferior to those offered by available credits. (Although beyond the scope of this guidance, those utilizing retention credits are permitted to delay payment of federal payroll taxes relating to 2020 until the end of 2021 or 2022. Those benefits are limited for those receiving loan forgiveness under the Paycheck Protection Program.) Even if this cost-benefit analysis is not performed, businesses should plan to maximize the extent of the credits available. For example, those with available cash reserves may consider delaying the recognition of certain gross receipts to a subsequent quarter if they have not maximized the creditable amount for each employee.
These descriptions are intended for informational purposes only and should not be taken as legal advice on any particular set of facts or circumstances. Rosenberg Martin Greenberg, LLP is experienced in all aspects of federal and state tax laws, legislative developments concerning the CARES Act, addressing prior compliance issues, white collar criminal litigation, and more. We continue to monitor developments related to the CARES Act. We anticipate that further regulations and interpretations will be promulgated in the coming weeks and months. Please check our website periodically for updates. For more information, please contact Brandon Mourges at 410.951.1149 or firstname.lastname@example.org
 As of the date of writing, the $349 billion devoted to the Paycheck Protection Program had already been completely exhausted. Congress is in the process of securing additional funding for the program; however, it is expected that the funds will again be exhausted and some employers may miss out.
 To the extent that an employer pays healthcare expenses allocable to such sick leave wages, the employer may also qualify for an additional amount of refundable credit.
 Although the amount of the Employee Retention Credit may be reduced by this amount, the amount is still refundable. In other words, an employee that both is required to pay sick leave and retains the employee may be eligible for both credits with respect to wages paid that employee.
 For simplification, this analysis does not include any effect of credits available for paid sick leave.
 This assumes a maximum benefit of the Paycheck Protection Program of 8/52 of an employee’s annual pay (i.e., the amount that may be forgiven). Since the employee retention credit is not subject to this temporal limitation, lower-paid employees can have a higher percentage of their wages subsidized by the government under the credit provisions.
 Since the credit applies at a rate of 50% for up to $10,000 in wages paid, it will take more than one quarter to maximize the credit for lower-paid or part-time employees. For instance, for employees less than $20,000/year, the credit will likely be spread across at least the first three quarters of 2020.