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How does the CARES Act Impact Tax Deferral and Credit Programs?

March 30, 2020

The CARES (Coronavirus Aid, Relief, and Economic Security Act) offers many provisions to assist companies impacted by the COVID-19 pandemic.

The Coronavirus Aid, Relief, and Economic Security Act also known as the “CARES” Act has many provisions to assist impacted companies. In this summary we will look at payroll tax deferral and credit programs that will be available.

Please note that if you have stopped paying payroll, be sure to not cancel your payroll processing plan; there are still quarterly and annual tax filing requirements that will need to be made, even if you are not currently paying employees. You should only cancel your processing plan in the unfortunate circumstance that you are closing the business permanently. Contact your payroll service provider for more information.

Please also note that employers who receive loan forgiveness under the Paycheck Protection Program provision included in the CARES Act are ineligible for the payroll tax deferral and the employee retention credit described below. Please click here to learn more about the Paycheck Protection Program and other loans available to help small businesses and nonprofit entities.

Payroll Tax Deferral

The CARES Act provides employers and self-employed individuals the option to defer payment of employer social security taxes (6.2% tax rate) incurred from the date of enactment through December 31, 2020. Employers and self-employed individuals will be required to pay 50% of the deferred amounts by December 31, 2021 and the remaining 50% due by December 31, 2022.

No interest will be charged on the deferred payroll taxes, so this is essentially an interest free loan. The Internal Revenue Service will be issuing guidance on how the deferral amounts will be reported and repaid, however it is widely believed that such reporting and repayment will be included as a component of future quarterly payroll tax filings.

Employee Retention Credit

The Employee Retention Credit, is a refundable tax credit for 50% of wages paid by employers to employees that is limited to the first $10,000 of compensation paid to each employee. This credit is limited to employers whose operations were fully or partially suspended by a shutdown order or whose gross revenues declined more than 50% when compared to the same quarter in the prior year.

Only wages paid during the shutdown period or instances where sales declined more than 50% in comparison to the same quarter in the prior year are eligible for this credit. Wages paid in accordance with the Family and Medical Leave as part of the Coronavirus Relief Act are ineligible. The eligibility period is limited to the end of the shutdown order or when revenue reaches 80% in comparison to the same quarter in the prior year.

For employers with more than 100 employees, the credit is limited to those employees who are not providing any services due to a shutdown order of the business or a drop in revenue. For employers with less than 100 employees, all wages paid will qualify for the credit.

The credit will be applied against employer social security taxes on the employer’s quarterly payroll tax filings. In the case where the allowable credit is greater than the payroll taxes due for the quarter, that excess will be considered an overpayment and the excess amount “refunded” to the employer.

Payroll Tax Credit for Sick and Family Leave

The CARES Act amended certain parts of Section 7000 of the Families First Coronavirus Act (FFCA).

These amendments essentially advance the credits for paid and sick family leave required under the FFCA. The credit will now be advanced through quarterly payroll tax filings. To the extent the credit exceeds payroll taxes due for the quarter, the excess amount will be refundable to the employer.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis. With a completely remote workforce our advisors are always available.

We’re always here to help; visit our Coronavirus Resource Center.

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