This Practice Update was updated pursuant to the IRS-issued guidance on April 10, 2020. Please contact the authors if you have any questions or comments.
Congress enacted the Families First Coronavirus Response Act (FFCRA), which requires certain employers to provide paid leave to workers who are unable to work (or telework) due to circumstances related to COVID-19 and, in return, Congress created a refundable payroll tax credit to offset the cost of providing the required leave. Then, fewer than ten days later, Congress passed the unprecedented Coronavirus Aid, Relief, and Economic Security (CARES) Act, which, among other things, provides for (i) Paycheck Protection Program (PPP) loans administered by the Small Business Administration (SBA), (ii) a tax credit for certain “employee retention” costs, and (iii) potential deferral of employer Social Security taxes. The payroll tax credit and deferral provisions of FFCRA and the CARES Act intersect in different ways with the PPP loans.
There are a number of factors a business should consider in determining which course of action is best for it. These factors include, among other things:
- Type and amount of loans available under the CARES Act;
- Whether the business wants or intends to seek loan forgiveness under the CARES Act;
- The availability of any payroll tax credits; and
- The availability of payroll tax deferral under the CARES Act.
This post provides an overview of the interplay between the three types of payroll tax credits and one type of payroll tax deferral available under FFCRA and the CARES Act, and addresses some of the common questions we have received from employers.
Payroll Tax Credits
The three types of available payroll tax credits correspond to:
- Wages, employer health plan expenses, and Medicare taxes paid by eligible employers for required sick leave under FFCRA (FFCRA Section 7001);
- Wages, employer health plan expenses, and Medicare taxes paid by eligible employers for required family leave under FFCRA (FFCRA Section 7003); and
- Wages and employer health plan expenses paid by eligible employers to or on behalf of certain employees during the COVID-19 crisis (CARES Act section 2301).
Family/Sick Leave Tax Credits: An employer is generally eligible for PPP loans under the CARES Act even if the employer is also receiving sick/family leave tax credits under FFCRA; however, the amount of “payroll costs” included in the loan will not include the amount of wages/expenses for required sick/family leave under FFCRA and the loan proceeds may not be used for wages/expenses for required FFCRA sick/family leave for which a tax credit is allowed.
Employee Retention Tax Credit: The CARES Act provides a refundable payroll tax credit equal to 50% of qualified wages for certain “eligible employers” for wages paid or incurred between March 13, 2020 and December 31, 2020 (an “employee retention tax credit”). An employer may not however “double up” on tax credits for the same wages. Thus, an employer may not take an employee retention tax credit for required sick/family leave wages under FFCRA for which the employer also receives a payroll tax credit. Further, employers may not receive an employee retention tax credit if the employer also receives a PPP loan. CARES Act section 2301(l)(3) specifically requires Treasury to issue regulatory guidance on how the IRS will recoup the tax credit if an employer receives a credit and then also receives a PPP loan, so it appears an employer’s eligibility for a PPP loan will not be affected by taking the tax credit – rather, there will be some form of repayment or offset of the tax credit if the employer also receives a PPP loan. In this regard, taking the tax credit may affect the amount of forgiveness available (meaning, a reduction in the amount of loan forgiveness may be how Treasury decides to recoup the credit). However, given the current lack of guidance, we do not have certainty on what position Treasury will take.
Given this, and the expectation that SBA PPP loans may be oversubscribed, every employer should model out the various options and potential outcomes to make a business decision based on what makes the most sense for their particular circumstances.
Payroll Tax Deferral
Under CARES Act section 2302, an employer may defer the employer portion of Social Security taxes due between March 27 and December 31, 2020, provided at least 50% of the deferred taxes are paid by the end of 2021 and the remainder is paid by the end of 2022. However, employers that have their indebtedness forgiven under the Paycheck Protection Program are not eligible to defer these taxes.
As we noted in our original posting, it is unclear from the statutory language precisely how this provision would work. However, on April 10, the IRS issued guidance clarifying that an employer may defer the employer’s portion of Social Security taxes until it actually receives a decision from its lender that its PPP loan has been forgiven. At that point, the employer may no longer defer the employer portion of Social Security taxes. Importantly, no Social Security taxes deferred prior to the date of loan forgiveness will immediately become due – the employer is permitted to delay depositing previously-deferred taxes until the applicable due dates (i.e., December 31, 2021 and December 31, 2022).
As noted above, we recommend modeling the various costs and benefits to determine what makes sense for your business given your particular facts and circumstances.