Three New Payroll Tax Provisions For Eligible Employers

Signed into law in the waning days of 2020, the Consolidated Appropriations Act (CAA) provides some new tax breaks for employers — including three payroll-related items. These are the employee retention tax credit, family and medical leave tax credit, and tax deferral of certain employee payroll taxes. Let’s take a closer look at each one.

1. Employee Retention Tax Credit

The COVID-19 pandemic made it difficult for many employers to keep workers on the books in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March of 2020, provided some relief. And the Consolidated Appropriations Act (CAA) extends some provisions (with a few modifications) through June 30, 2021.

Under the CARES Act an employer could claim an employee retention credit (ERC) for 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers were able to benefit immediately from the credit because it reduced the Social Security component of tax deposits. If an employer’s current payroll tax deposits were insufficient to cover the credit, the employer could obtain an advance payment from the IRS.

To qualify for the ERC, an employer originally had to meet one of two requirements during any calendar quarter: 1) It was forced to fully or partially suspend operations because government authorities limited commerce, travel or group meetings due to pandemic concerns or 2) It experienced a significant decline in gross receipts. For the CARES Act credit, a “significant decline” occurred when gross receipts were less than 50% of gross receipts in the same calendar quarter of 2019. Only the first $10,000 of wages paid to an employee during the designated time frame qualified for the credit. Therefore, employers could claim a maximum credit of $5,000 per employee.

The CAA has made the following modifications to the original credit:

• It increased the credit to 70% of the first $10,000 of qualified wages for two quarters, for a maximum credit per worker of $14,000 (70% x $10,000 of qualified wages for two quarters).
• A safe-harbor rule permits employers to determine their eligibility by using gross receipts from the previous quarter.
• If an employer was operational for only part — or none — of 2019, it’s still eligible to claim the credit.
• An employer that receives PPP loans may still qualify for the ERC for wages that aren’t paid with forgivable PPP loan proceeds.

Note that this last item applies to credits claimed for 2020 based on the CARES Act.

2. Family and Medical Leave Credit

Shortly before the CARES Act was enacted in 2020, the president signed the Family First Coronavirus Response Act (FFRCA) into law. Although this law has received less attention than the CARES Act or the CAA, it authorized a tax credit for qualified employers that provide paid family and medical leave to employees.

The FFRCA credit was scheduled to expire on December 31, 2020. The CAA extends the credit through March 31, 2021, with a few modifications. Then and now, employers were eligible for this credit if they provided paid leave to employees for COVID-19-related reasons. This included employees who were subject to a government quarantine or isolation order or who were experiencing COVID-19 symptoms but hadn’t yet received a diagnosis.

Now, the credit isn’t available for employees who have exhausted their leave entitlements. Employers, however, may still voluntarily provide paid leave to these workers. In other words, there’s no requirement for small employers to continue providing emergency sick leave or family leave payments after December 31, 2020. But between January 1, 2021, and March 31, 2021, employers can choose to make voluntary leave payments that fall within the FFCRA framework — and collect the tax credit if they do so.

3. Payroll Tax Deferral

Finally, the new law extends the deadline for making certain employee payroll tax payments to the federal government. But don’t confuse this tax break with the deferral of an employer’s portion of payroll taxes.

Employer portion. Under the CARES Act, an employer affected by the COVID-19 pandemic was authorized to defer some payroll taxes that typically would have been due in 2020. This deferral applied to the employer’s share of the 6.2% Social Security tax component. The deferral period began on March 27, 2020, and ended on December 31, 2020. Employers were then required to pay the deferred payroll tax amount in two installments:

• Half by December 31, 2021, and
• The second half by December 31, 2022.

This payroll tax deferral option was available to all employers, with no requirement to show any specific COVID-19-related impact. Unfortunately, the CAA doesn’t extend this deferral.

Employee portion: A subsequent presidential memorandum enabled employers to postpone payment of the employee’s portion of Social Security tax through December 31, 2020. The deferral was optional and available for employees who earned wages of less than $4,000 for a biweekly pay period (or the equivalent for another pay period). Employers then had to withhold the deferred taxes from an employee’s pay and deposit them with the IRS between January 1, 2021, and April 30, 2021.

The CAA now gives employers until December 31, 2021, to meet payroll tax obligations relating to the presidential memorandum. After that date, interest and penalties will start accruing for employers with deferred amounts that haven’t been repaid.

Not For Everyone

Keep in mind that this article only covers three key aspects of the CAA and that not all employers are eligible to take advantage of these tax provisions. Contact Kirsch CPA Group at 513.858.6040 for more information.