Making Smart Choices from the COVID-19 Tax Relief Options
The Paycheck Protection Program (PPP) Increase Act of 2020 adds billions of dollars to the already $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The CARES Act is a well received gift to individuals and businesses, including meaningful tax relief. The recent addition of new funds brings more good news.
The tax relief offered by the CARES Act is over and above the tax relief offered by the earlier Families First Coronavirus Response Act (FFCRA).
The FFCRA requires small employers—those with fewer than 500 employees—to provide limited paid leave to employees who are affected by the coronavirus pandemic.
However, those businesses can claim tax credits to cover the cost of mandatory leave payments, and they also receive federal payroll tax relief.
Also, the IRS has graciously postponed some federal tax filing and payment deadlines. For the latest postponement, see COVID-19: IRS Dramatically Expands Tax Filing and Payment Relief.
The Real Issue
Even though all this COVID-19-related federal tax relief is helpful, taking advantage of certain tax relief measures can cause conflict with your eligibility for other certain federal relief measures that might actually be more valuable.
In many of these cases, you will have a lot of choices and you must be smart with which items you choose from the COVID-19 tax relief menu. However, you can take advantage of some tax relief measures with no downside which is very nice.
We will go through what we think are the most important COVID-19-related tax relief measures. This will help you be more prepared to make the right COVID-19 Relief options.
So let get into it, based on what we know as this was written.
CARES Act Economic Impact Payments for Individuals (No Impact on Eligibility for Other Federal Relief Measures)
Economic impact payments are the highly publicized free-money checks from the federal government. They can be up to $1,200 per individual or $2,400 for a married couple. Folks with under-age-17 dependent children can receive up to another $500 per child.
Although, this free money is not available to everyone. For example, you likely won’t qualify for an economic impact payment if any of the following apply:
· Your adjusted gross income was greater than $99,000 if your filing status was single or married filing separately; $136,500 for head of household; and $198,000 for married filing jointly.
· You can be claimed as a dependent on someone else’s return. For example, this would include a child or student who can be claimed on a parent’s return.
· You do not have a valid Social Security number.
· You are a nonresident alien.
· You filed Form 1040-NR, Form 1040NR-EZ, Form 1040-PR, or Form 1040-SS for 2019.
For more on the economic impact payments, see COVID-19: Important Tax Breaks from the CARES Act.
Small Employer Tax Credits and Payroll Tax Relief to Cover Required COVID19-Related Paid Leave for Employees (No Double Tax Benefit Allowed)
The FFCRA preceded the CARES Act. The FFCRA grants tax credits and payroll tax relief to small employers— those with under 500 employees—to cover payments that these employers must now make for COVID-19-related emergency sick leave and emergency family leave pursuant to the FFCRA.
Credit for Required Leave Payments
Small employers can collect a federal tax credit equal to 100 percent of required emergency sick leave and emergency family leave payments made pursuant to the FFCRA. But the credit covers only leave payments made during the period beginning on April 2, 2020, and ending on December 31, 2020.
The credit is increased to cover the portion of the employer’s qualified health plan expenses that is properly allocable to the emergency sick leave and emergency family leave wages paid pursuant to the FFCRA.
The credit is first used to offset the Social Security tax component of the employer’s quarterly federal payroll tax bill for all wages paid to all employees.
Any remaining credit is offset against the employer’s otherwise required federal payroll tax deposits for FICA (Social Security and Medicare) taxes withheld from employee wages, federal income tax withheld from employee wages, and the employer’s share of FICA tax on employee wages.
Any remaining excess is refundable, meaning the government will issue payment to the employer for the excess.
A Crucial Point in 2020
Employers can now request advance payments of the credit by filing new IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
No Double Tax Benefit Allowed
The 50 percent employee retention credit allowed by the CARES Act (which we explain later) cannot be claimed for the same wages taken into account for claiming the FFCRA credit for 100 percent of required employee leave payments.
Our Strategy
Small employers should first claim the FFCRA credit for 100 percent of required leave payments and then claim the CARES Act 50 percent employee retention credit for other eligible wages.
The FFCRA credit for required employee leave payments is not available to employers that are already receiving the pre-existing federal credit for paid family and medical leave under Internal Revenue Code Section 45S.
Payroll Tax Relief
Emergency sick leave and family leave payments mandated by the FFCRA are exempt from the 6.2 percent Social Security tax component of the employer’s federal payroll tax that normally applies to wages.
Employers must pay the 1.45 percent Medicare tax component of the federal payroll tax, but they can claim a credit for that outlay.
You can find additional thoughts on the FFCRA in COVID-19: Significant Payroll and Self-Employment Tax Relief.
Leave Credits for Self-Employed Individuals
Let’s say you are a self-employed individual who has been affected by the corona virus pandemic, the FFCRA allows you to claim a refundable credit against your federal self-employment tax bill.
If the credit exceeds your self-employment tax bill, the government will issue you a payment for the excess.
The credit is equal to:
· 100 percent of the sick-leave equivalent amount, plus
· 67 percent of the sick-leave equivalent amount for taking care of a sick family member or taking care of your child following the closing of the child’s school or childcare location.
The sick-leave equivalent amount equals the lesser of
· your average daily self-employment income, or
· $511 per day for up to 10 days (up to $5,110 in total) to care for yourself due to the coronavirus, or
· $200 per day for up to 10 days (up to $2,000 in total) to care for a sick family member or to care for your child following the closing of the child’s school or childcare location due to the coronavirus emergency.
Average daily self-employment income means your net self-employment earnings for the year divided by 260.
In addition, you can claim a coronavirus emergency family leave credit for up to 50 days. The credit amount equals the number of qualified family leave days multiplied by the lesser of
· $200, or
· your average daily self-employment income. The maximum total family leave credit is $10,000 (50 days x $200 per day).
The bill states these credits are allowed only for days during the period beginning on April 1, 2020, and ending on December 31, 2020.
Key point.
As we wrote this, there was no way for self-employed folks to request advance payment of these credits. Will the IRS do something to allow advance payments? Maybe later. Stay tuned.
Key point. To prove your entitlement to the sick leave tax breaks, you must maintain documentation of how you were affected.
CARES Act Employee Retention Credit (Can Conflict with Eligibility for Other Federal Relief, and No Double Tax Benefit Allowed)
The CARES Act allows a refundable federal payroll tax credit that has been dubbed the employee retention credit.
The credit amount equals 50 percent of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. The credit is subject to an overall wage cap of $10,000 per eligible employee.
Eligible Employers Staus
Eligible employer status for the 50 percent employee retention credit is determined on a 2020 calendar-quarter basis. The credit is available to all employers, including non-profits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel, or group meetings due to COVID-19.
The credit can also be claimed by employers that have experienced a decline of greater than 50 percent in gross receipts for a 2020 calendar quarter compared with the corresponding 2019 calendar quarter.
But the credit is disallowed for quarters following the first 2020 calendar quarter during which gross receipts exceed 80 percent of gross receipts for the corresponding 2019 calendar quarter.