The COVID-19 pandemic has upended normal life for many Americans. Among other disruptions wrought by the virus, many employers have experienced financial difficulties caused by a disrupted workforce, crippled cash flows, and an overall reduction in revenues.
A variety of federal programs are in place to help employers navigate the challenges presented by COVID-19. Some of these programs provide employers with badly needed relief to constricted cash flow; others primarily aid impacted employees, while some offer assistance to both employers and employees.
Each of the available programs presents a slightly different form of relief, and each brings its own requirements and considerations. Here, we provide some commonly asked questions and answers, as well as a brief overview of what these programs offer.
COVID-19 Tax Credits
Q. What payroll tax reduction programs are available to help employers impacted by the COVID-19 crisis?
A. There are three primary programs that were enacted to help employers reduce their payroll tax burden:
- Employee retention credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act,
- Paid leave credits under the Families First Coronavirus Response Act (FFCRA), and
- Payroll tax deferral.
We break down each of these programs below and provide additional programs to consider.
Employee Retention Credits
Q. Which employers are eligible for the employee retention credits provided under the CARES Act?
A. Employee retention credits give eligible employers a credit against their share of Social Security taxes. These credits are available to employers with:
- Partially or fully suspended business operations due to federal, state, or local governmental orders.
- Quarterly gross receipts that are less than 50% of their gross receipts during the same quarter in the prior year.
- Certain employers are ineligible, including governmental employers and employers that receive a Paycheck Protection Program (PPP) loan.
Eligible employers are given a credit against their share of Social Security tax equal to 50% of “qualifying wages” paid to employees from March 13, 2020, through December 31, 2020, up to $10,000.
“Qualifying wages” vary with the employer’s size. Eligible employers with 100 or fewer employees may receive credit for wages paid to all employees, while eligible employers with more than 100 employees only receive credit for wages paid to employees who are unable to work.
Paid Leave Credits
Q. How do paid leave credits work?
A. Most employers with fewer than 500 employees must provide emergency paid sick leave and emergency paid family and medical leave to employees impacted by COVID-19. Subject to certain conditions, when employees take emergency paid leave, employers may retain federal income taxes and employment taxes to help offset the costs of the paid leave.
Deferral of Employer Payroll Taxes
Q. When will employers deferring payroll taxes need to repay the deferred taxes?
A. Employers that choose to defer payroll taxes will need to pay back the deferred payroll taxes over 2 years. Half of the deferred taxes must be repaid by December 31, 2021, and the second half is due December 31, 2022.
Employers, regardless of their size, may defer employer Social Security deposits required through December 31, 2020. Deferral of these taxes may free employer cash flows to address other obligations, such as operating expenses and payroll. However, this program does not eliminate the tax liability.
Qualified Disaster Relief Payments
Q. What are qualified disaster relief payments (QDRPs)?
A. The tax code permits employers to reimburse employees on a tax-free basis for certain “reasonable and necessary” personal, family, living, and funeral expenses incurred due to a “qualified disaster.”
Q. What relief can QDRPs provide for employers and employees?
A. These payments can reimburse employees impacted by the COVID-19 crisis (which is a qualified disaster) for expenses such as COVID-19 treatment or additional expenses incurred due to remote work arrangements.
Q. How does a Supplemental Unemployment Benefit (SUB) plan work, and what benefits can it provide for out-of-work employees?
A. A SUB plan is an Internal Revenue Service (IRS)-approved vehicle for providing employees with additional unemployment benefits beyond those paid through the state unemployment system.
These additional benefits are paid upon involuntary termination due to a reduction in force, job elimination, or a reorganization (they are unavailable in the case of termination for cause). To be eligible, terminated employees must qualify for and apply for state unemployment benefits and periodically certify that they remain unemployed and available for work.
Remote Work Tax Withholding
Q. For employees who have been working remotely during the COVID-19 pandemic, how can this impact their tax withholdings?
A. No changes are required for most remote employees if their residence is in the same state as their ordinary work location. However, employers near a state line with remote workers may need to adjust some state income tax withholdings and/or State Unemployment Insurance (SUI) contributions. Additionally, the correct state for SUI purposes is identified through a fairly complex analysis and may not be the same state for which income tax is withheld.
For a more detailed discussion of these programs and related topics, please join Michael K. Mahoney for the live webinar “The Payroll Professional and the Pandemic: helping employees mitigating Risks and Finding savings Opportunities,” presented by BLR® on December 10, 2020. Click here to learn more or to register today!
Michael K. Mahoney is a Shareholder at Ogletree Deakins. Mahoney is a member of the Employee Benefits and Executive Compensation Practice Group and the Chair of the Payroll Tax and Fringe Benefits Subgroup. He focuses on employment tax matters at both the federal and the state level and strategic tax issues for a global workforce.