Recent Covid-19 legislation creates new payroll tax incentives for employers, which fall into two main categories: Payroll Credits and Tax Deferral. All these relief measures were established by the Families First Coronavirus Response Act (Families First Act), enacted March 18, 2020 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted March 27, 2020.
The following are 10 facts employers need to know about these payroll tax incentives:
- Employers Can File to Use Payroll Credits Beginning in 2020 2Q. Form 941 instructions clarify that employers who paid qualified wages from March 13-31, 2020 should claim the associated Payroll Credits in 2020 2Q. They cannot be claimed on the 2020 1Q return. As noted below, Form 941 was revised for the second quarter of 2020 to account for the Payroll Credits. The second quarter filing window closes on July 31, 2020.
- Employer Can Benefit from Payroll Credits Now. To get immediate cash into employers’ pockets, the IRS will allow the credits to reduce not only the employer’s AND the employees’ share of both Social Security and Medicare, but also the employees’ federal income tax withholding. Moreover, the IRS will not require a business to wait until it files its payroll tax return to claim the Payroll Credits. Instead, the business may reduce its current payroll tax obligation by the amount of the anticipated credits.
- Employers Cannot Claim Credits Twice on Same Income. Employers cannot claim both family leave/sick credits and the employee retention credit on the same wages paid. Employers can claim both, provided they use different wages.
- Refund Now Using Form 7200. Employers can file form 7200 now to claim advance payment of anticipated Payroll Credits. If necessary, employers can file Form 7200 several times during each quarter. Employers must fax completed forms to 855-248-0552. The form cannot be e-filed or mailed.
- Social Security Deferral Available Now. All employers regardless of size may defer the employer’s 6.2% share of Social Security (OASDI) taxes, which is calculated per employee at 6.2% of the first $137,700 of employee wages. Fifty percent of the deferred amount must be paid by December 31, 2021 with the balance payable by December 31, 2022 (Deferral Due Dates). This amounts to an interest free loan through the Deferral Due Dates.
- Deferral Does Not Apply to Medicare. Employers cannot defer the employer’s portion of its.45% Medicare tax, which is calculated on all employee wages with no cap.
- Deferral is Not All or Nothing. Employers can choose to defer all or a portion of their liability. There is no prepayment penalty for paying the deferred amount early.
- Deferral Available If Utilizing Payroll Credits. Employers can defer its share of social security even if the employer claims Payroll Credits. The IRS clarified that employers can defer its share of Social Security tax BEFORE determining the amount of payroll deposits it must make or any allowable refund of Payroll Credits.
- Payroll Protection Program (PPP Loan). Employers that obtain, or intend to obtain, a PPP loan may nevertheless defer the employers’ share of Social Security until such time the loans are forgiven, and those amounts can remain deferred until the Deferral Due Dates.
- New Form 941 for 2020 2Q. On June 20, 2020, the IRS finalized tax Form 941: Employer’s QUARTERLY Federal Tax Return to collect information about the new COVID-19 tax incentives provided to small businesses, expanding the form from two to three pages, and adding 58 new data fields (previously 18 total lines). Small Businesses must use this form for the second, third and fourth quarters 2020 and many will be unprepared for its new complexity, which contains new data-entry fields to report both Payroll Credits and Tax Deferral.