The COVID-19 viral infection has devastated economies across the world and the United States. Maryland predicts a $2.8 billion loss in state revenue, including a $1 billion loss in income tax revenue due to the pandemic. Congress's passage of the CARES Act and the Paycheck Protection Program have been much-needed assistance for small business owners in Maryland, providing a variety of options for financial relief. However, the new legislation is also causing a great deal of confusion for employers. Recent changes to the Paycheck Protection Act will hopefully make it easier for employers to choose the most appropriate financial relief package.
Deferral of Payroll Taxes under the CARES Act
With the passage of the CARES Act on March 27, 2020, employers could defer their portion of the Social Security payroll tax, which is 6.2%. Section 2302 of the CARES Act allows employers to defer those payroll taxes from March 27, 2020, to December 31, 2020, provided employers repay the amounts deferred in equal installments before December 31, 2021. However, the biggest drawback to electing to defer payroll taxes was the Paycheck Protection Program (PPP) exclusion. Under the original Cares Act legislation, if an employer received forgiveness of a PPP loan, the employer couldn't opt to defer payroll taxes.
Paycheck Protection Program Loan Forgiveness
The Paycheck Protection Program passed in April 2020, is a Small Business Administration loan intended to help businesses keep their workforce employed during the COVID-19 crisis. Businesses could have PPP loans forgiven if they met employee retention criteria, and used them for eligible expenses like rent, salaries, mortgage interest, or utilities.
Unfortunately, when the PPP launched, not all businesses could quickly tell if they qualified for the loans and, even if they did, the loans were difficult to obtain. As a result, business owners didn't know if they should elect to defer payroll taxes or wait to see if they became eligible for the PPP. On June 5, 2020, the president signed the Paycheck Protection Program Flexibility Act, to eliminate confusion and provide businesses with more options. Now, taxpayers can take advantage of the payroll tax deferral provision of section 2032 of the CARES Act regardless of whether they obtain PPP loan forgiveness.
IRS Form 941 Employee Retention Tax Credits
As a result of the CARES Act, employers also have the option of claiming employee retention credits, or ERC. Like the PPP, Congress intended the ERC to provide relief for struggling small businesses. But the ERC isn't a loan; it is a refundable tax credit. Businesses typically use IRS Form 941 to report income and social security and Medicare taxes withheld from employee wages and the employer's share of those taxes. Employers calculate the ERC each quarter for wages paid after March 12, 2020, and before January 1, 2021, making the ERC available for quarters two through four, and part of quarter one, in 2020. The ERC credit amount is 50% of qualifying wages, up to $10,000 per employee, for all quarters. That's essentially up to a $5,000 refundable tax credit for each employee with no loan application, no loan fees, and no waiting period.
Employers qualify for the ERC if they:
Had to fully or partially suspend operations due to a government order limiting commerce, travel, or group meetings for any quarter in 2020; or
Have a significant decline in gross receipts for a quarter in 2020.
Determining how and when to invoke tax credits, deferments, or available loan programs can be complicated depending on your tax situation. The tax attorneys at Gabaie & Associates, LLC have decades of experience assisting clients with tax problems, planning, and liabilities. If you need help determining how the Paycheck Protection Program and CARES Act will affect your business or individual tax situation, contact Gabaie online or at 443-345-8291.