Payroll Tax Credits and More to Get You Through the Pandemic

By at 3 September, 2020, 3:48 pm

By Barbara Weltman

COVID-19 triggered stay-at-home orders, business closures, and government shutdowns. To try to preserve jobs and save businesses, federal policy created various tax credits to help employers and employees weather the pandemic. Some comparable tax breaks have been provided to self-employed individuals. And there’s an opportunity to defer a portion employment taxes. Here are these credits and other opportunities, as well as what you can expect in the future.

Tax Credits for Employers

New tax credits help employers pay employees for certain sick leave and family leave necessitated by the pandemic. Another credit induces employers suffering as a result of the pandemic to keep employees on the payroll.

Paid sick leave and paid family leave credits

The Families First Coronavirus Relief Act (FFCRA) mandated that small employers (fewer than 500 employees) provide certain paid sick leave and paid family leave to employees impacted by COVID-19 from April 1, 2020, through December 31, 2020. The credit amounts vary with the reason for which wages were paid to employees.

The credits are received by offsetting employment taxes, which is figured quarterly on Form 941. In other words, employers figure their credits and then keep employment taxes that would otherwise have been deposited and paid. If employment taxes don’t cover the credits, advance payments can be received by filing Form 7200.

The IRS has extensive FAQs on the FFCRA credits.

Employee Retention Credit

To keep employees on the payroll, the CARES Act gives “eligible employers” a refundable tax credit equal to 50% of qualified wages (which includes health coverage) up to $10,000 that are paid after March 12, 2020, and before January 1, 2021 (i.e., a credit of up to $5,000 per employee).  Eligible employers are businesses with operations that have been partially or fully suspended due to governmental orders related to COVID-19 or businesses that have a significant decline in gross receipts compared to 2019.

Like the credit above, the employee retention credit is received by offsetting employment taxes, which is figured quarterly on Form 941. If such taxes don’t cover the credit, advance payments can be received by filing Form 7200. However, the credit cannot be claimed if the employer received a Paycheck Protection Program (PPP) loan, regardless of the date of the loan (unless the loan was repaid by May 18, 2020). But an employer can claim both the paid sick/family leave credits and the employee retention credit for the same employees, just not with respect to the same wages for those employees.

The IRS has extensive FAQs on the employee retention credit.

Note: Employers that are getting back into operations and are seeking new employees should not overlook the existing work opportunity tax credit for hiring individuals from certain targeted groups, one of which is the long-term unemployed. This credit is an offset to the employers’ income taxes. But the credit cannot be claimed with respect to wages taken into account for the other credits discussed earlier.

Special Rules for Self-Employed Individuals

Business owners who are self-employed and don’t have employees can claim comparable tax credits for paid sick leave and paid family leave as long as they are “eligible self-employed individuals.” These are individuals unable to work or telework because of being quarantined, ill, or seeking a diagnosis of COVID-19, or unable to work or telework because of caring for an ill child or a child whose school or daycare has been closed due to COVID-19. Because there are no payroll taxes from which to subtract the credits, the breaks for self-employed individuals are claimed as refundable tax credits to offset income taxes (they’re claimed on the 2020 Form 1040 and 1040-SR that will be filed in 2021). Again, check IRS FAQs (#60 through #66) for the rules for self-employed individuals.

Payroll Tax Deferral on the Employer Side

Employers can choose to defer their portion of Social Security tax on compensation paid during the payroll tax deferral period (March 27, 2020, through December 31, 2020). No interest is charged on the deferred amount. Then 50% of the deferred amount must be paid by the end of 2021 and the other 50% by the end of 2022. Deferral is permissible even if employers obtain forgiveness of PPP loans.

A similar deferral option applies to self-employment tax paid by self-employed individuals on their net earnings. This can impact estimated tax payments for such individuals.

Again, the IRS has extensive FAQs on the deferral of employment tax deposits and payments, including how deferral interacts with the credits discussed earlier. These FAQs also address the rules for self-employed individuals (FAQS #21 through #24).

Payroll Tax Deferral on the Employee Side

A Presidential Memorandum provides a payroll tax deferral for employees, and IRS guidance has recently been published to implement it.  Congress would need to vote to support forgiveness (which has been talked about), but the tax break would need to be included in another stimulus package. But that is looking unlikely at this point in time.

This deferral applies to the employee portion of Social Security payroll taxes (6.2%). Medicare payroll taxes and the employer portion of Social Security payroll taxes are not included.

Employers may defer the employee portion of payroll taxes for wages for certain employees whose wages are less than $4,000 for a biweekly period starting September 1, 2020-December 31, 2020 Wages with pay periods of a different length must be adjusted – see the House Ways and Means Committee “How it Works” document here.

The Ways and Means Committee document covers pay back rules and additional information, such as:

● “An employer must withhold and pay the total applicable taxes deferred in 2020 from wages and compensation paid from January 1, 2021, to April 30, 2021. If an employer is unable to do so, then the employer may make arrangements to otherwise collect the deferred taxes from the employee.”

● “Interest, penalties, and additions to tax will begin to accrue on May 1, 2021, with respect to any unpaid taxes.”

There are still questions about who is on the hook for these tax payments if an employee leaves, for example, or if the employer cannot collect the tax liability. This type of deferral can also be complex for small businesses to implement, with additional costs to make payroll changes.

Looking Ahead

Keeping employees working is an important key to a sound economic recovery. Toward this end, there may be additional tax incentives enacted to encourage employees to retain and perhaps expand their staff.

For example, the work opportunity tax credit mentioned earlier is set to expire at the end of 2020. However, it could be extended to 2021. What’s more, it’s possible that new targeted groups could be added to incentivize employers to hire individuals impacted by the pandemic.

During this election season, it is doubtful, though not impossible, that any additional tax incentives for employers and/or employees will be enacted before the election in November. And any future tax incentives will hinge on the outcome of those elections.


Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.

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