Welcome
Payroll News

CARES Act Offers Payroll Loan, Retention Credit, Delayed Deposits (1)

March 30, 2020, 10:53 PMUpdated: April 2, 2020, 1:42 PM

Many payroll-related forms of relief to employers in response to the coronavirus outbreak were enacted through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which President Donald Trump signed into law March 27.

The payroll provisions of the CARES Act followed up on payroll provisions enacted by another coronavirus-related stimulus bill, the Families First Coronavirus Response Act (FFCRA), which President Trump signed March 18.

The CARES Act established a program for qualifying employers to acquire a forgivable loan to cover payroll costs, established a payroll tax credit for retaining employees and continuing to pay them compensation, delayed the due dates for paying the employer portion of Social Security tax that otherwise would have been due for the remainder of 2020, modified aspects of the FFCRA’s provisions on paid leave and tax credits for providing paid leave, and temporarily expanded the types of payments for which employers may provide educational assistance excludable from gross income.

Forgiveness of Loans for Covering Eligible Payroll Costs

Qualifying employers can acquire a forgivable loan to cover payroll costs they incurred for an eight-week period within the span from Feb. 15 to June 30, 2020, under the CARES Act’s Paycheck Protection Program, which is to be administered by the Small Business Administration. The eight-week period would start with the origination date of the forgivable loan.

The forgivable loan generally is available for employers with up to 500 employees. However, if the administration determines that an employer operates in an industry for which the standard number of employees that a small business in that industry would have is more than 500, the employer would be eligible for the forgivable loan if it has up to that number of employees.

Employers with multiple locations and that are in the accommodation and food-services sector, i.e., those in North American Industry Classification System Code 72, also may be eligible for a forgivable loan if at each of their locations they have no more than 500 employees.

The principal of the loan would be able to be forgiven, but interest still could be charged on the loan. The maximum rate of interest that could be charged on the loan is 4%.

Eligible payroll costs that may be covered by the forgivable loan include the amounts of salaries, wages, commissions, or similar compensation; payments of cash tips or equivalents of such tips; payments for vacation, parental, family, medical, or sick leave; allowances for dismissals or separations from employment; payments, such as insurance premiums, that are required for providing group health care benefits, including the continuation of such benefits during periods of paid family, medical, or sick leave; retirement benefit payments; and payments of state taxes or local taxes assessed on compensation paid to employees.

The forgivable loan cannot cover the amount of compensation paid to an employee “in excess of an annual salary of $100,000, as prorated” for the period from Feb. 15 to June 30. While the enacted version of the CARES Act does not specify the exact prorated amount for the period from Feb. 15 to June 30, it is notable that the originally proposed version of the CARES Act referred to an employee’s compensation in excess of $33,333 for the four-month period from March 1 to June 30 as unable to be covered by the forgivable loan, and that this is a prorated amount of one-third of $100,000 for one-third of a year. As the period from Feb. 15 to June 30 represents four and one-half months, employers should recognize that an annual salary of exactly $100,000 would have a prorated equivalent of $37,500 to cover a period of four and one-half months, although it is likely that the federal government will provide clarification regarding this proration in upcoming guidance.

The forgivable loan also cannot cover:

  • the costs of Social Security and Medicare taxes, i.e., taxes imposed by Internal Revenue Code Chapter 21;
  • the costs of taxes assessed under the Railroad Retirement Tax Act, i.e., taxes imposed by I.R.C. Chapter 22;
  • amounts of federal income tax required to be deducted at source from employment income paid to employees, i.e., federal income tax required to be deducted under I.R.C. Chapter 24;
  • compensation paid to employees who have a principal place of residence outside the U.S.;
  • the cost of paid sick leave related to COVID-19 that employers with fewer than 500 employees are required to provide to qualifying employees under the Families First Coronavirus Response Act (FFCRA); and
  • the cost of paid public health emergency leave under the expanded Family and Medical Leave Act that employers with fewer than 500 employees are required to provide to qualifying employees under the FFCRA.

Costs of paid leave that employers are required to provide under the FFCRA are ineligible for coverage by the forgivable loan because these amounts can be recovered through crediting them against the employer portion of Social Security tax.

The amount of the loan that an qualifying employer may acquire to cover payroll costs generally is the sum of (1) the result of multiplying 2.5 by the average total monthly payments the employer made for payroll costs during the one-year period before the date the loan was made, and (2) the outstanding amount of any disaster-relief loan that the employer acquired from the administration for the purpose of financing small business concerns because the disaster caused the employer to experience substantial economic injury, as long as that loan was made on or after Jan. 31 and before the forgivable loan was made available to the employer via the Paycheck Protection Program.

Seasonal employers, instead of measuring average total monthly payments during the one-year period before the date the loan was made, may use the average total monthly payments for payroll costs for the 12-week period starting Feb. 15, 2019, or for the period from March 1, 2019, to June 30, 2019. Employers that were not in business during the period from Feb. 15, 2019, to June 30, 2019, may use their average total monthly payments for payroll costs during the period from Jan. 1, 2020, to Feb. 29, 2020, instead of average total monthly payments for any time before 2020.

However, even with the aforementioned calculations, the maximum amount of the forgivable loan that a qualifying employer may acquire to cover payroll costs is $10 million.

The forgivable loan of up to $10 million, in addition to covering payroll costs, also in general can cover payments of interest on a mortgage obligation, rent, costs of utilities, and interest on any other debt obligations that were incurred before Feb. 15. All of these elements are eligible for forgiveness, except the interest on any other debt obligations that were incurred before Feb. 15. The ability for the loan to cover these elements was established by expanding Section 7(a) of the Small Business Act, which is codified in the U.S. Code as 15 U.S.C. 636(a) and under which other types of loans for small businesses are available.

To apply for the forgivable loan, the employer must provide a lender authorized to service the loan with documentation verifying its number of full-time employees and amounts of payments during periods relevant to calculating the amount of the loan that may be forgiven, including payroll tax filings submitted to the Internal Revenue Service and state income, payroll, and unemployment insurance filings; documents verifying mortgage payments, lease obligations, and utility costs covered by the loan; a document from an authorized representative of the employer certifying that the documents the employer submitted to the lender are accurate and that the loan was used for permitted purposes; and any other documentation that the administration determines to be necessary for submission.

Any amount of the loan that otherwise would be included in an employer’s gross income because of forgiveness is excludable from the employer’s gross income.

Conditions Reducing Loan Forgiveness

While the total amount of payroll costs and other costs covered by the loan generally is fully forgivable, part of the loan would lose its eligibility for forgiveness if the employer that receives the loan reduces its number of employees or reduces employees’ salaries or wages in ways specified by the CARES Act that would cause full eligibility for forgiveness to be rescinded.

The principal of an employer’s loan would not be able to be fully forgiven if the employer’s average number of full-time equivalent employees per month during the eight-week period covered by the forgivable loan is less than the employer’s average number of full-time equivalent employees per month during the look-back period that the employer chooses from among two options. The two options for the applicable look-back period are the period from Feb. 15, 2019, to June 30, 2019, and the period from Jan. 1, 2020, to Feb. 29, 2020. The employer would not need to be subject to reduced loan forgiveness, even if the employer experienced a workforce reduction with regard to one of the look-back periods, if the employer’s average number of full-time equivalent employees per month during the other look-back period was equal to or less than the employer’s average number of full-time equivalent employees per month during the eight-week period covered by the loan.

However, if the employer’s average number of full-time equivalent employees per month during the eight-week period covered by the loan is lower than for both of the look-back periods, the employer, after choosing which look-back period provides a more favorable result, would calculate the portion of the loan principal for which it may acquire forgiveness as equivalent to the result of dividing its average number of full-time equivalent employees per month for the eight-week period covered by the loan by its average number of full-time equivalent employees per month for the look-back period that it chose. Seasonal employers seeking to determine whether they have reduced loan forgiveness eligibility would be required to use the look-back period from Feb. 15, 2019, from June 30, 2019.

For determining the portion of the loan ineligible for forgiveness, the average number of full-time equivalent employees is “determined by calculating the average number of full-time equivalent employees for each pay period falling within a month,” according to the CARES Act. The part of the CARES Act containing the forgivable loan provisions, which is Title I, does not provide a precise definition for full-time equivalent employee but specifies that an employer’s number of full-time equivalent employees for applicable periods is determined based on the employer’s payroll tax filings with the Internal Revenue Service and state income, payroll, and unemployment insurance filings.

However, another part of the CARES Act, Title II, identifies that for the purposes of some provisions within Title II, the term full-time employee has the meaning that it has within I.R.C. Section 4980H, which refers to the shared-responsibility provisions and information reporting provisions for applicable large employers under the Affordable Care Act. IRS guidance regarding the applicable large employer threshold has said that with regard to determining the number of an employer’s full-time employees, an employer must count its number of full-time equivalent employees, with each full-time equivalent employee having at least 30 hours of service per week during a month or at least 130 hours of service during the month as a whole. While it is unclear whether this definition of full-time equivalent employee applies to the forgivable loan provisions of Title I of the CARES Act, it is likely that the federal government will issue guidance to clarify the definition of full-time equivalent employee for the forgivable loan provisions.

The reduction in loan forgiveness related to reducing employee compensation is a dollar-for-dollar reduction based on the degree that an employee’s compensation is reduced in excess of a threshold percentage. The amount of the loan eligible for forgiveness would be reduced by the amount by which any reduction in an applicable employee’s total salary or wages during the eight-week period covered by the forgivable loan exceeds 25% of the employee’s total salary or wages during the most recently completed calendar quarter when the employee was employed before the eight-week period. An applicable employee for this calculation is an employee who did not receive during any pay period in 2019 wages or salary that if annualized would be more than $100,000.

If the portion of an employer’s loan eligible for forgiveness would be reduced because of a reduction in workforce or reduction in compensation that occurred from Feb. 15 to April 26, 2020, the employer could avoid the reduction if the employer by June 30, 2020, hires enough employees or raises compensation to such an extent that had the employer had that total number of full-time equivalent employees and its employees had those compensation levels during the eight-week period covered by the loan, there would not have been a reduction in the portion of the loan eligible for forgiveness.

Any amount of the loan that was not granted forgiveness has a maximum maturity of 10 years from the date when the employer applied for loan forgiveness, and the interest rate on that loan cannot exceed 4%. Deferments of principal, interest, and fees for an amount of the loan that was not granted forgiveness are available in some cases, with a deferral period of at least six months and up to one year.

An employer seeking to acquire a forgivable loan to cover payroll costs must certify to the administration that economic uncertainty because of the coronavirus outbreak caused the loan to be necessary to support its ongoing operations, that the amount of the loan will be used only for covering eligible payroll costs and other permitted costs, that the employer does not have a pending application with the administration for another loan for the same purpose and that is for the same amount of funding that was applied for or received as per another loan for that purpose, and that for the period from Feb. 15 to Dec. 31 the employer has not received another loan amount for the same purpose and for the same amount of funding that was applied for or received as per another loan for that purpose.

Payroll Tax Credit for Retaining Employees

Under the CARES Act, eligible employers may acquire a refundable tax credit against the employer portion of Social Security tax imposed by I.R.C. Section 3111(a) based on amounts of qualified wages paid to employees from March 13 to Dec. 31, 2020. This tax credit is known as the employee retention credit.

The amount of this tax credit available for a three-month quarter generally is equal to half of the qualified wages that the employer paid to employees for that quarter, although only up to $10,000 in qualified wages paid per employee for 2020 can be taken into account for determining the total amount of this tax credit that may be acquired across the four quarters of 2020.

The text of the CARES Act does not identify the employee portion of Social Security tax imposed by I.R.C. Section 3101(a), the employee portion of Medicare tax imposed by I.R.C. Section 3101(b), and the employer portion of Medicare tax imposed by I.R.C. Section 3111(b) as taxes against which payments of qualified wages may be credited.

The refundable amount of this credit is the amount, if any, by which an employer’s payroll tax credit for a quarter with regard to retaining employees exceeds the employer portion of Social Security tax for the quarter, as reduced by up to four other credits against the employer portion of Social Security tax for that quarter: the new FFCRA credit for providing paid sick leave related to COVID-19, the new FFCRA credit for providing paid public health emergency leave, the I.R.C. Section 3111(e) credit for employing qualified veterans, and the I.R.C. Section 3111(f) credit for research expenditures of qualified small businesses. The refundable amount would be treated as a refundable overpayment.

An employer cannot apply the employee retention credit against its payroll tax liability if the employer acquires a loan through the Paycheck Protection Program, even if the employer did not receive forgiveness of all or part of the loan.

An employer is eligible for this payroll tax credit for a quarter if the employer is carrying on a trade or business in 2020 and in that quarter the employer fulfilled the business suspension condition or the gross receipts condition. The business suspension condition is that the employer needed to fully or partially suspend its business operations for the quarter because of a governmental order issued in response to the coronavirus outbreak that limited commerce, travel, or the size of group meetings. The gross receipts condition is that among the four quarters of 2020, the employer is eligible for this payroll tax credit starting with the quarter in which the employer’s gross receipts were less than half of its gross receipts for the same calendar quarter in 2019, and ending with the quarter in which the employer’s gross receipts were more than 80% of its gross receipts for the same calendar quarter in 2019.

The definition of qualified wages differs between employers that in 2019 on average had more than 100 employees and employers that in 2019 on average had up to 100 employees, with the definition of full-time employee for this purpose the same as that used in the Affordable Care Act provisions of I.R.C. Section 4980H. For employers with more than 100 employees, qualified wages are those that an employer pays to an employee for a quarter even though the employee is not providing services because the employer fulfilled either the business suspension condition or the gross receipts condition, and the qualified wages paid to such an employee for a period during a quarter in which the employee is not performing services cannot exceed the amount the employee would have been paid for working during an equivalent duration in the 30 days immediately before that period of not providing services. For employers with up to 100 employees, qualified wages are those which an employer pays to an employee, regardless of whether the employee ceased providing services, while the employer fulfilled either the business suspension condition or the gross receipts condition.

Qualified wages do not include amounts of paid sick leave related to COVID-19 and amounts of paid public health emergency leave that employers with fewer than 500 employees generally are required to provide under the Families First Coronavirus Response Act. However, qualified wages include qualified health-plan expenses of the employer that are expended to maintain a group health plan and that are excluded from employees’ gross income under I.R.C. Section 106(a).

Delayed Payment of Employer Portion of Social Security Tax

Amounts of the employer portion of Social Security tax that normally would need to be paid to the government for the period from March 27 to Dec. 31, 2020, do not need to be paid according to the normally applicable deposit timeline and instead may be delayed under the CARES Act.

An employer that chooses to delay payment of the employer portion of Social Security tax that otherwise would be due for the period from March 27 to Dec. 31, 2020, would need to deposit half of that delayed amount by Dec. 31, 2021, and the other half by Dec. 31, 2022, for that delayed payment of the employer portion of Social Security tax to be considered timely.

The text of the CARES Act does not identify the employee portion of Social Security tax imposed by I.R.C. Section 3101(a), the employee portion of Medicare tax imposed by I.R.C. Section 3101(b), and the employer portion of Medicare tax imposed by I.R.C. Section 3111(b) as taxes for which deposits may be delayed. No filing deadlines for reporting the employee and employer portions of Social Security and Medicare taxes were delayed by the Act.

An employer is ineligible to delay paying its portion of Social Security tax if it acquires a loan through the Paycheck Protection Program also established by the CARES Act and for which all or part of the loan was forgiven.

The CARES Act specifies that if an employer uses an agent to perform deposits of employment taxes and directs the agent to delay payments of the employer portion of Social Security tax as allowed by the Act, the employer, and not the agent, is responsible for ensuring that the amounts of delayed tax due are paid by the delayed due dates. The CARES Act also specifies that if an employer is a customer of a certified professional employer organization and the employer directs the certified professional employer organization to defer payments of the employer portion of Social Security tax as allowed by the Act, the employer, and not the certified professional employer organization, is responsible for ensuring that the amounts of delayed tax due are paid by the delayed due dates.

Adjustments to Paid-Leave Provisions of FFCRA

Section 3605 of the CARES Act modified the Families First Coronavirus Response Act’s definition of an employee eligible for public health emergency leave to care for a child younger than 18 because the child does not have access to educational or child-care services to which the child otherwise would have had access if the coronavirus outbreak had not caused a loss of access.

Employees still are generally eligible for public health emergency leave if they have been employed for at least 30 days by the employer from which they have requested the leave. However, the CARES Act clarified that an employee who was separated from employment and was then rehired is considered to have been employed for at least 30 days for the purpose of eligibility for public health emergency leave if the employee was laid off by the employer on or after March 1, 2020, worked for the employer for at least 30 days in the 60-day period ending on the date when the employee was laid off, and then was rehired by the employer.

Section 3606 of the CARES Act waives penalties under I.R.C. Section 6656 for failing to make deposits of amounts of the employer portion of Social Security tax on employment income subject to the tax if those amounts were not deposited because the employer anticipated that a credit against the employer portion of Social Security tax allowable under Section 7001 or Section 7003 of the FFCRA equaled or exceeded those amounts. Section 3606 also allows a refundable tax credit against the employer portion of Social Security tax for payments of paid leave required under the FFCRA to be “advanced, according to forms and instructions” of the Secretary of the Treasury, with respect to the amount that would be refundable based on the employer portion of Social Security tax that otherwise would be due for the most recent pay period.

Additionally, while Sections 3601 and 3602 of the CARES Act do not materially change the paid leave provisions of the FFCRA, they slightly amended the language of provisions of the FFCRA to clarify that the established maximum limits on payments for paid leave required under the FFCRA were intended as maximum limits per employee.

Temporary Expansion of Educational Assistance Programs

The types of payments that qualify as educational assistance that may be provided to employees and excluded from their gross income under an educational assistance program conforming with I.R.C. Section 127 have been temporarily expanded by the CARES Act to include payments by an employer from March 28 to Dec. 31, 2020, of the principal or interest of qualified educational loans incurred by employees for their education.

These payments of the principal or interest of qualified educational loans may be made directly to the employee or to a lender.

While payments of an employee’s tuition expenses for the employee’s education already qualified as educational assistance excludable from gross income, the ability to pay an employee’s loan principal or interest connected with a qualified educational loan expands employers’ options for assisting employees with their educational expenses.

The CARES Act did not change the generally applicable annual limit in employer-provided educational assistance that may be excluded from an employee’s gross income, which remains $5,250. A reimbursement by an employer for job-related educational expenses, even when the annual amount of the reimbursement exceeds $5,250, still may be treated as a nontaxable working condition fringe benefit.

(Updated to include interaction between the Paycheck Protection Program and the employee retention credit.)

To contact the reporter on this story: Howard Perlman in Washington at hperlman@bloombergtax.com

To contact the editor on this story: Michael Trimarchi in Washington at mtrimarchi@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.