Employee Retention Tax Credit Can Reduce Federal Payroll Taxes Beginning March 12, 2020

For many small businesses, first quarter federal payroll tax returns (Form 941) and payments will be due on April 28, 2020. On March 31, 2020, the IRS issued guidance for the Employee Retention Credit (Credit) created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Credit is designed to encourage certain eligible employers to keep employees on their payroll despite the economic hardship created by the COVID-19 pandemic.

How does the Credit work?
The Credit is a fully refundable credit equal to 50% of certain wages (including both cash wages and certain health plan expenses) that certain employers pay their employees. The Credit applies to wages paid after March 12, 2020 and before January 1, 2021. The maximum amount of the credit is $2,500 (50% of $5,000 in wages) for any one employee, and up to $5,000 (50% of $10,000 in wages) total for all employees.

Eligible employers are those that either fully or partially suspend operation during any calendar quarter in 2020 due to a stay-at-home order issued by a governmental authority, or employers that experience a significant decline in gross receipts during the calendar quarter (at least a 50% decline compared to the same quarter in 2019).

How do I receive the Credit?
Eligible employers can access the credit immediately by reducing their required deposits of payroll taxes that have been withheld from employees’ wages. These deposits are usually paid together with their quarterly IRS Form 941, which is due on April 28, 2020 for the first quarter of 2020. Because the Credit is refundable, employers may request a refund of any unused balance of the Credit by submitting IRS Form 7200 – Advance Payment of Employer Credits Due to COVID-19.

What about the payroll tax credit for paid sick leave and other COVID-19 tax relief?
The Families First Coronavirus Relief Act (FFCRA) requires employers to provide paid sick or family leave to employees who are unable to work due to COVID-19. The FFCRA also provides a credit against federal payroll taxes for qualifying sick leave wages, and the same wages cannot be counted for both the Credit under the CARES Act and the credit under the FFCRA.

Although additional guidance is still pending, the amount of the payroll tax Credit received under the CARES Act may impact or reduce the availability of other forms of COVID-19 relief, such as the payroll protection loan under the Paycheck Protection Program.

For more information on this issue, contact Ross Uehara-Tilton at rut@hawaiilawyer.com