Payroll Tax Relief Provisions of COVID-19 Legislation

In response to the coronavirus pandemic, Congress has passed legislation to encourage continued payment of wages and benefits by providing relief to employers in the form of payroll-related tax credits, loans, and tax-deferral programs, including:

• for businesses with fewer than 500 employees, tax credits to cover the cost of paid sick and paid family leave coverage required for those employees;
• tax-free forgiveness of certain government-guaranteed loans to small businesses to cover payroll and operating expenses during the coronavirus pandemic;
• a payroll tax credit for qualifying wages paid during a time when the employer’s business has been suspended or experienced a significant decline in revenue; and
• deferral of an employer’s portion of 2020 Social Security taxes not recovered under the payroll tax credit.

I. Tax Credits for Paid Sick Leave and Family Leave

The new legislation requires employers with fewer than 500 employees to provide mandatory paid leave relating to the coronavirus between April 1, 2020 and December 31, 2020. To offset these costs, it also provides for refundable tax credits to offset these costs in full.  

Sick Leave Credit. Employers with fewer than 500 employees are required to provide paid sick leave, but are also allowed a refundable tax credit (the “Sick Leave Credit”) to offset wages paid to employees who take emergency sick leave related to the coronavirus between April 1, 2020 and December 31, 2020. The Sick Leave Credit is designed to entirely offset the cost of sick leave benefits mandated by the new laws, which provide for maximum payments of $2,000 or $5,110 per employee, depending on the type of sick leave. 

Under the new laws, an employee is entitled to be paid his or her regular rate of pay up to $511 per day for 10 days (or a maximum of $5,110) if he or she is unable to work or telework because of a governmental isolation order related to coronavirus, a self-quarantine advised by a healthcare provider, or symptoms of the coronavirus. Employees who are unable to work or telework because they are caring for a child or other individual in one of those situations, or are caring for a child whose school or daycare has been closed in connection with the coronavirus, are entitled to receive two-thirds of their regular rate of pay up to a maximum of $200 per day for 10 days (or a maximum of $2,000). 

Family Leave Credit. Employers with fewer than 500 employees are required to provide paid expanded family and medical leave.  However, those employers are also allowed a refundable tax credit (the “Family Leave Credit”) to offset wages paid to employees who take expanded family leave related to the coronavirus between April 1, 2020 and December 31, 2020. The Family Leave Credit is designed to entirely offset the cost of family leave benefits mandated by the new law, which could be up to $12,000 if the paid family leave lasts the full 12 weeks. 

Under the new law, an employee is entitled to be paid two-thirds of his or her regular rate of pay up to $200 per day for 12 weeks (or a maximum of $12,000) if he or she is unable to work or telework solely because he or she is caring for a child whose school or daycare is closed, or child care provider is unavailable due to coronavirus, provided that the maximum total period of paid leave mandated by the new law (and related available tax credits) for sick leave and family leave is a combined 12 weeks. 

Updated May 1, 2020:  The Sick Leave Credit and the Family Leave Credit are fully refundable. An eligible employer may receive a refund if the aggregate amount of the credits for any calendar quarter exceeds the employer’s payroll taxes with respect to all the employer’s employees. Eligible employers may claim their refunds using Internal Revenue Service (“IRS”) Form 941.

Additionally, eligible employers are permitted to reduce the amount of payroll taxes that otherwise would be required to be deposited with the IRS during a calendar quarter by the amount of credits available to the employer. The employer must then account for the reduced deposits on the employer’s Form 941. If an employer’s eligible credits exceed the amount of payroll tax deposits that would otherwise be due, the employer can file IRS Form 7200 to request and receive an advance of the refund prior to the end of the calendar quarter.

II. Paycheck Protection Program Loan Forgiveness

The new legislation established what is called the “Paycheck Protection Program,” a guaranteed, unsecured loan program designed to help employers fund certain operational costs of their businesses from February 15, 2020 through June 30, 2020. Up to $349 billion is available to provide guaranteed, low-interest, no-fee loans under the program. Loan funds may be used for payroll costs, continuing healthcare benefits during paid sick leave or family leave, insurance premiums, mortgage interest payments, rent and utility payments, and interest on other debt incurred before February 15, 2020. No personal guarantee or collateral is required, interest is capped at 4% per year, and repayment is deferred for at least six months and up to 12 months.

To borrow under the program, each employer must certify that:

• the loan is necessary because of the coronavirus pandemic;
• the employer will use the funds to retain workers, maintain payroll, and make lease and utility payments; and
• the employer has not received funds for overlapping uses under another government program (participation is not permitted for employers that receive the Payroll Tax Credit or Payroll Tax Deferral (both defined below).

Please see our recent client alert discussing the Paycheck Protection Program.

Loan Forgiveness. Provided a borrower complies with minimum employment and salary requirements, employers may be entitled to forgiveness of all or a portion of the loan principal, for the costs incurred or paid during the initial eight weeks of the loan to the extent such costs relate to payroll, mortgage interest, rent, or utilities. Loan forgiveness under this program does not result in the recognition of taxable cancellation of debt income by the borrower, provided that such forgiveness does not exceed the loan principal amount. In addition, forgiveness is not available to the extent of payroll costs with respect to an employee’s allocable portion of any annual compensation in excess of $100,000 per year. 

Updated April 7, 2020: The Small Business Administration issued guidance with respect to the Paycheck Protection Program. Loans issued under the program will have a two-year term and accrue interest at a 1% rate. Although loans issued in connection with this program may be used for those items listed above, 75% of the loan proceeds, and therefore, loan forgiveness, must be attributed to payroll costs.

III. Employee Retention Tax Credit—The Payroll Tax Credit

Under the new laws, eligible employers are allowed to take a quarterly employment tax credit (the “Payroll Tax Credit”) equal to 50% of “qualified wages” of up to $10,000 per employee, which are paid for the period March 12, 2020 through December 31, 2020. Therefore, the maximum credit available to an employer is $5,000 per employee. The credit first offsets an eligible employer’s payroll taxes for the quarter and any remainder is refunded to the taxpayer. 

Eligible Employer. An employer is eligible to take a Payroll Tax Credit only if the employer has been carrying on a trade or business in 2020 and was subject to one of the following “coronavirus conditions” during the calendar quarter:

• the business was fully or partially suspended because of a governmental order related to the coronavirus; or
• the business experienced a year-over-year decline of more than 50% of gross receipts for a calendar quarter.

For employers who take the credit because of a significant decline in gross receipts, the credit will continue to be available for all calendar quarters through December 31, 2020, up to and including the first quarter in which the company’s revenue increases to at least 80% of the gross receipts in the same calendar quarter of the prior year. For example, if a company’s second quarter 2020 revenue is less than 50% of its second quarter 2019 revenue, but its third quarter 2020 revenue is 80% of its third quarter 2019 revenue, the employer would be eligible for the Payroll Tax Credit in the second and third quarters of 2020 but not the fourth quarter of 2020.

Qualified Wages.  Except for wages paid by an employer with no more than 100 full-time employees in 2019, “qualified wages” means compensation (including qualified healthcare expenses) paid to employees for a period during which they are not providing services due to coronavirus-related circumstances, generally meaning employees that are furloughed. In contrast, all wages paid by employers with no more than 100 full-time employees are “qualified wages,” if paid during a quarter in which the business is experiencing one of the coronavirus conditions. Entities that are members of the same affiliated group or that are related by more than 50% ownership are generally considered a single employer for purposes of determining the number of full-time employees. 

Wages. For this purpose, the term “wages” generally includes cash, benefits, equity, prizes, certain tips, and any other remuneration provided to an employee in connection with the employee’s services. It does not include payments in connection with a stock bonus, pension or profit sharing plan, certain annuity plans, a simplified employee pension plan, or a simple retirement account, but it does include payments to an employer-sponsored individual retirement plan. Qualified health plan expenses are also wages for this purpose. Qualified health plan expenses include an employer’s costs to maintain a group health plan, but only to the extent that they are excluded from the gross income of employees as employer-provided coverage under an accident or health plan.

Penalty Waiver and Election Out. Penalties associated with failure to deposit employment taxes may be waived if the failure is due to a reasonable anticipation of the Payroll Tax Credit. Employers may elect out of receiving the Payroll Tax Credit. 

Coordination with Other Payroll Tax Benefits. A number of overlapping benefits reduce the availability of this credit.  First, “qualified wages” are decreased by any wages taken into account for purposes of the Sick Leave Credit, the Family Leave Credit, or the employer tax credit for paid family and medical leave that pre-dates the new legislation. In addition, no credit is available for an employer who received a Paycheck Protection Program loan or for any wages paid to an employee during a period in which the employer was allowed the pre-existing work opportunity credit for that employee. 

Updated May 1, 2020:  The Payroll Tax Credit is first applied to offset any other tax liability on an eligible employer’s employment tax return, including taxes due on wages paid to employees that are not “qualified wages.” The excess after such offset is refundable and may be claimed by the eligible employer using IRS Form 941. Additionally, because the Payroll Tax Credit can apply to wages paid after March 12, 2020, eligible employers may choose to reduce upcoming deposits or request an advance of the credit. If quarterly employment tax deposits that are otherwise required are less than an employer’s available Payroll Tax Credit, the employer may receive the remaining credit in advance using IRS Form 7200.

IV. Payroll Tax Deferral

The new legislation imposes a temporary moratorium on the payment of an employer’s share of Social Security taxes required to be deposited on or after March 27, 2020 and before January 1, 2021 ("Payroll Tax Deferral"). Deferred payments must be paid in two installments, 50% by December 31, 2021 and 50% by December 31, 2022.  During the period of deferral, employers are not required to make normally required periodic tax deposits of the employer’s Social Security taxes.

Coordination with Other Coronavirus Related Payroll Tax Benefits. Payroll Tax Deferral is not available to employers who receive loan forgiveness under the Paycheck Protection Program and, to the extent an employer claims the Payroll Tax Credit, can only be used on amounts in excess of the qualified wages for which such credit is received. 

Relief Available Based on Business Size/Number of Employees

As noted above and illustrated below, the type of relief (and, in the case of the Payroll Tax Credit, the amount of relief) varies with the size of a business, specifically, its number of employees. In this regard, each business with fewer than 500 employees will be eligible to take a full credit for amounts paid to employees for required paid sick leave and family leave but will then need to determine whether to take advantage of a paycheck protection loan or a combination of the Payroll Tax Credit and the Payroll Tax Deferral. In addition, in weighing this decision, wages taken into account for purposes of determining the paid sick and family leave credits reduce the amount available as a Payroll Tax Credit.