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Impact of COVID-19 on federal payroll taxes

| May 11, 2020 | Employment Tax Law

Payroll taxes make up about 2/3 of the IRS’ annual revenue. With the COVID-19 pandemic sweeping the globe and unemployment at an all-time high, the IRS is expecting a significant decline in this revenue, meaning after the panic has ended, they will need to replenish this deficit. So how will the IRS likely go about recouping this loss? They are likely to aggressively pursue employers looking for back payroll taxes that may be owed.

The reason for this angle is simple. The IRS can more easily go after a single employer, instead of individually investigating anywhere from 10 to 10,000 employees. In short, they will gain a lot more with less effort by focusing on employers versus employees. For employers, this means that once the pandemic begins to die down and it returns to business-as-usual, they will likely face a new approach from the IRS, a significantly more aggressive one. This means employers who are taking advantage of the many refundable credits enacted by Congress need to ensure they follow appropriate protocols. Requirements for taking the credits must be properly interpreted or businesses can end up in hot water with the IRS after the pandemic is over.

Refundable tax credits enacted by Congress

There are three refundable credits that have been enacted by Congress during the COVID-19 pandemic in the hopes of easing the burden on both employers and employees who are affected directly by the virus, or indirectly by the stay-at-home order and other precautions taken during this time. The three credits include:

  • The Qualified Sick Leave Credit (FFCRA)
  • The Qualified Family Leave Credit (FFCRA)
  • The Employment Retention Credit (CARES ACT)

Qualified Sick Leave Credit

With so many cases of coronavirus and the need to quarantine for a significant amount of time after testing positive, Congress passed an act that provides financial relief for both employees and employers during the time of high levels of employee illness. Under the Act, employees will be given paid leave when they are out of work due to COVID-19 related illness. Employers will be given refundable credits for this leave against their portion of Social Security Taxes.

Qualified Family Leave Act

In addition to sick pay, the Family Medical Leave Act was expanded to allow paid leave for employees who are unable to work due to caring for a family member sick with COVID-19 or caring for children, due to COVID-19 related school closures. Employers will be allowed refundable credits that are equal to the following:

  • Leave payments to employees
  • Pre-tax health plan expenses
  • The employer portion of the Medicare taxes while employees are on leave

CARES Act

The CARES Act set provisions to help continue employment for company workers through the use of the Employee Retention Tax Credit and Paycheck Protection Program. The refundable Employee Retention Tax Credit provides a credit for employers for up to 50 percent of qualifying wages from the 13th of March until the end of the year as well as crediting a portion of employer-provided healthcare. Both for-profit and non-profit companies of every size are eligible, and the credit will apply to each quarter where business activities are either fully or partially suspended under stay-at-home government orders. In these quarters, the gross receipts will need to fall below 50 percent of what was made in the same quarter for the year 2019.

Another provision of the CARES Act includes the Paycheck Protection Program (PPP), which allows government small business loans to companies with less than 500 employees. Companies can expect to borrow up to $10 million dollars or 250 percent of the average payroll costs of the business each month. To qualify for the loan, the funds will need to be used to cover payroll costs (at least 75%), mortgage interest, rent, and utilities for the eight-week period following the date of the loan. If all full-time employees are retained, then the loan repayment may be forgiven, if only a partial workforce returns, then the forgivable portion of the loan will be reduced based on the percentage decline of the number of full-time employees returning.