Payroll Tax Provisions for Businesses in the CARES Act

by | Mar 30, 2020

NOTICE – As of April 1, the IRS has posted frequently asked questions that will answer some details not known at the time of this article.  For additional information, please visit the IRS website, click here

These payroll tax provisions are intertwined with many other law changes. Further guidance will be forthcoming from the Internal Revenue Service. We encourage you to reach out to your payroll processing company for additional guidance if you believe these credits will apply to you.

Employee Retention Credit for Employers Subject to Closure due to COVID-19

Certain employers are eligible for a refundable payroll tax credit on wages paid during the crisis (specifically, between March 13, 2020 and December 31, 2020). The credit applies to employers whose businesses are disrupted, suspended, or closed due to COVID-19 but continue to pay their employees during the crisis.

A business becomes eligible if either of two situations occurs:

  1. The operation of the business is fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, or
  2. The business continued to operate, but during any calendar quarter in 2020, gross receipts for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in 2019. In this case, the credit applies to each quarter until the business has a quarter in which its gross receipts exceed 80% of gross receipts for the same quarter in 2019.

For each eligible quarter, a business receives a credit against its 6.2% share of Social Security payroll taxes equal to 50% of the qualified wages paid to each employee for that quarter, ending on December 31, 2020.

The business’s qualified wages depend on its size, as follows:

  • If the business averaged more than 100 full-time employees during 2019, qualified wages are limited only to those wages that were paid during the quarter for the period of time during which the business was fully or partially suspended. In other words, these are wages paid to employees who are not providing services during a shutdown.
  • If the business averaged less than 100 full-time employees during 2019, qualified wages include wages paid to employees during a shutdown as well as wages paid during each quarter during which the business saw a significant decline in gross receipts, as described above.

In either case, qualified wages cannot include amounts paid in excess of what an employee would have been paid for working an equivalent amount of time in the 30 days prior to the period of closure or significant reduction in gross receipts.

Also, in either case, qualified wages include any qualified health plan expenses, such as amounts paid or incurred by the business to provide and maintain a group health plan.

Finally, in either case, the amount of qualified wages for each employee for all calendar quarters may not exceed $10,000.

Any wages taken into account in determining the new payroll tax credit for family medical leave or sick leave as part of the previously passed Coronavirus Relief Act may not be taken into account in determining qualified wages for the employee retention credit. An “employer” for purposes of this credit is defined in the same way as it has been in certain other contexts, namely, the rules governing controlled groups of corporations in Section 52 of the Internal Revenue Code, and the “ERISA” rules governing employee benefit plans in Section 414 of the Internal Revenue Code. These rules are complex and should be discussed with your tax advisor or payroll service provider.

Further guidance will likely be produced as to the mechanics of how this credit will be handled with payroll services. Discussion is ongoing and there is a possibility that payroll tax deposits made by the employer will be reduced by the amount of the credit, giving immediate relief.  Until additional guidance is given by the Internal Revenue Service, the relief as currently written would come at the filing of the quarterly payroll report, which is due at the end of the month following the close of a quarter.

The payroll retention credit is refundable if it exceeds a business’s liability for payroll taxes.  It is our understanding that this credit will also be made available at the close of a quarter.

Note that if an employer takes a small business interruption loan under Section 7(a) of the recently passed CARES Act, no employee retention credit is available.

Delayed Payment of Employer Payroll Taxes

In addition to the new payroll tax credits created by the Coronavirus Relief Act and the CARES Act, the CARES Act allows deferral of payment of payroll taxes. The employer’s share of the 6.2% Social Security tax that would otherwise be due from now through December 31, 2020 may be paid, without penalty, by December 31, 2021 (first 50% of 2020 payroll taxes) and by December 31, 2022 (remaining 50% of 2020 payroll taxes).

Note that if an employer takes a small business interruption loan under Section 7(a) of the recently passed CARES Act, no deferral of payment is available.

As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.  

These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This is intended for illustrative and discussion purposes only.

Using POD and TOD Accounts in Your Estate Plan

Discover how Payable-on-Death (POD) and Transfer-on-Death (TOD) accounts streamline the inheritance process, enabling beneficiaries to bypass probate and access assets swiftly. While these tools offer speed and cost-effectiveness, they come with potential pitfalls that could disrupt your estate plan if not carefully coordinated. Explore their benefits and drawbacks to ensure seamless asset distribution among your loved ones.

The Strategic Power of Charitable Lead Trusts: How Families Can Transfer Assets While Making an Impact

Charitable lead trusts offer families a powerful strategy to dramatically reduce estate taxes while transferring appreciating assets to the next generation and supporting charitable causes simultaneously. By leveraging today’s low interest rate environment, a $10 million CLT could potentially transfer $3.7 million or more to family members while creating a taxable gift of only $528,700. However, families must carefully weigh the substantial benefits against significant risks, including asset underperformance, irrevocable structure, and complex administrative requirements.

Maximizing Your Itemized Deductions Under the One Big Beautiful Bill Act: A Strategic Guide for 2026

The One Big Beautiful Bill Act has fundamentally reshaped the landscape of itemized deductions, creating both new opportunities and challenges for taxpayers who want to maximize their tax savings. While the SALT deduction cap increases to $40,000 and new charitable giving options emerge, taxpayers also face a new 0.5% AGI floor on charitable deductions and limitations that effectively cap itemized deduction benefits at 35% for high earners starting in 2026. Success under the new law requires strategic multi-year planning, including bunching deductions in alternating years and carefully timing major deductible expenses to avoid new limitations while maximizing available benefits.

Maximize Your Legacy While Minimizing Taxes: The Strategic Guide to Charitable Remainder Trusts

If you’re looking to support your favorite charitable causes while maintaining an income stream and achieving significant tax benefits, a charitable remainder trust (CRT) could be the perfect solution. This sophisticated estate planning tool allows you to convert appreciated assets into lifetime income while making a meaningful charitable impact—all while potentially saving thousands in taxes. Whether you hold highly appreciated stocks, real estate, or other valuable assets, a CRT offers a strategic way to diversify your holdings, reduce your tax burden, and create a lasting philanthropic legacy.

Scenario Planning: A Roadmap for Business Agility

In a world of constant change and unpredictability, scenario planning empowers businesses to anticipate multiple futures and make informed decisions. This strategic approach helps organizations manage risks, optimize resources, and stay agile amidst economic volatility, technological advancements, and shifting consumer preferences. Discover how scenario planning can transform your company’s resilience and growth potential.

What Are Opportunity Zones?

Timing is key in maximizing the benefits of OZ investments. With thoughtful planning and strategic execution, OZs can be a cornerstone of both financial success and meaningful change.