FAQs: Employer Retention Tax Credit and Deferment of Payroll Taxes

BY Alex Ayers
4/10/2020 - HVAC Government Affairs , COVID-19

The CARES Act provided many options to businesses with ways to maintain cashflow and incentivize keeping workers on the payroll. Congress passed two tax incentives for employers to take advantage of during COVID-19: a fully refundable federal payroll tax credit for eligible employers that are suffering from economic hardship due to this pandemic and deferral of the employer share of Social Security payroll taxes. Through the Employee Retention Tax Credit, employers who continue to pay employees are eligible to receive a 50 percent tax credit for qualified wages, up to $10,000 per employee (maximum tax credit is $5,000 per employee). Businesses faced with cashflow issues may elect to defer payments for the employer share of payroll taxes if they do not participate in any special lending programs during COVID-19 with repayment of deferred taxes in 2021 and 2022.

Employee Retention Tax Credit:

Who is eligible?

The retention tax credit is available for a business that sees a 50 percent drop in gross receipts over the same quarter the previous year or face full or partial shutdown orders. The business must also not participate in the SBA Paycheck Protection Program or risk losing loan forgiveness.

Who is NOT eligible?

The credit is not available for businesses receiving special loan assistance through programs such as the Paycheck Protection Program. However, additional options may be available to larger employers that apply for a loan through the Treasury Department’s Coronavirus Economic Stabilization Act Program. HARDI will update members on the Coronavirus Economic Stabilization Act Program once more detail is released by the Treasury Department.

What are “qualified Wages”?

Qualified wages are the wages paid to an employee for time that the employee is not providing services. Many businesses may experience this if under a full or partial shutdown of operations from their State and wish to keep their workers on payroll. Qualified wages also include a significant decline in gross receipts. 

Click here to view the IRS FAQ advisory on the Employee Retention Credit.

Payroll Tax Deferral:

Who is eligible?

There are no gross receipts or shutdown tests as part of payroll tax deferral, however employers will not be able to have their PPP loans forgiven if they defer payroll tax payments.

When are the deferred taxes due?

50% of the deferred payroll taxes must be paid by December 31, 2021 with the remaining 50% due by December 31, 2022. There is no interest due for deferring these payments as long as the payments are made on time.

Are there any special rules regarding deferral and repayment?

For self-employed individuals, deferment is on 50% of self-employment taxes.

If an employer designates an agent or uses a certified professional employer organization to deposit employment taxes, the liability for late payments in 2021 or 2022 still falls on the employer.

Employers cannot defer the employee’s portion of payroll or income taxes.

Click here for more information on payroll tax deferral.

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