Legislation provides additional payroll credit and benefits tax relief

| 1/21/2021
Legislation provides additional payroll credit and benefits tax relief

The Consolidated Appropriations Act, 2021 (CAA), enacted on Dec. 27, 2020, expands certain payroll tax credits and benefits tax relief enacted in previous COVID-19 relief legislation and adds certain new tax relief for employers and employees. 

CARES Act employee retention payroll tax credit

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides eligible employers with an elective refundable and advanceable payroll tax credit, generally applied against the employer 6.2% Social Security tax. As originally enacted:

  • Eligible employers must have experienced either a full or partial suspension of operations due to a COVID-19-related government shutdown order or a decline of more than 50% in gross receipts within a 2020 calendar quarter compared to the same quarter in 2019. 
  • Generally, the credit equals 50% of qualified wages paid between March 13, 2020, and Dec. 31, 2020, and during the time an employer is considered eligible. 
  • Qualified wages include certain wages paid to any nonworking employee of an employer with more than 100 full-time employees in 2019, or such wages paid to any employee of an employer with 100 or fewer full-time employees in 2019 – capped at $10,000 per employee (including expenses allocable to the employee for health benefits) for 2020.
  • The credit was not permitted if the taxpayer (determined based on the taxpayer’s aggregated group) received a Small Business Administration loan under the Paycheck Protection Program (PPP). Read about the CAA’s significant amendments to the PPP.

Highlights of the CAA’s amendments to the CARES Act employee retention payroll tax credit that are effective for the first two quarters of 2021 include:

  • Extending eligibility to employers experiencing a decline of more than 20% in gross receipts in an applicable calendar quarter compared to the same quarter in 2019
  • Increasing the credit to 70% of qualified wages paid when an employer is eligible
  • Increasing the employee threshold for determining qualified wages to 500 full-time employees in 2019
  • Increasing the cap on qualified wages to $10,000 per employee per calendar quarter
  • Extending eligibility to certain government employers – IRC Section 501(c)(1) organizations exempt from tax, colleges, universities, or entities whose principal purpose or function is providing medical or hospital care

Additionally, retroactive to enactment of the CARES Act, and subject to certain rules to prevent double benefits as well as abuse with respect to moving employees, the CAA permits eligibility for the credit if a taxpayer has received a PPP loan.

Families First Coronavirus Response Act (FFCRA) payroll tax credits

The CAA extends availability of the payroll tax credits provided under the FFCRA for paid sick leave and paid family leave mandated under that legislation. As originally enacted, these mandated types of paid leave apply from April 1, 2020, until Dec. 31, 2020, and an employer could elect to receive a related refundable and advanceable payroll tax credit for each type of mandated paid leave. See an earlier article about the FFCRA for more details.

Even though the CAA does not extend the mandates for such paid leave, for the first quarter of 2021 the CAA permits an employer the related payroll tax credit if the employer provides any such paid leave as though the mandates were in effect until March 31, 2021.

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Disaster relief, including employee retention tax credit

The CAA includes a retroactive disaster-related employee retention credit, which operates as an income tax credit that may be elected by a for-profit eligible employer or as a payroll tax credit elected by a not-for-profit eligible employer. An eligible employer must have been “inoperable” at any time during 2020 (until Dec. 27) when a qualified disaster was in effect. The credit is based on wages of any employee whose principal place of employment immediately before the disaster was in a qualified disaster zone, generally capped at $2,400 of each employee’s wages. Generally, the wages are required to have been paid or incurred within the relevant time frame and from the date the business first became inoperable until the date significant operations were resumed (or 150 days if earlier).

This specific disaster credit historically has been provided in the case of natural disasters declared (within the relevant time frame) by the president under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It does not apply where a disaster has been declared solely by reason of COVID-19. The CAA includes other such historic disaster relief for employees affected by such disasters with respect to qualified retirement plan withdrawals and related repayments and qualified retirement plan loans.

Benefits tax relief

The CAA includes various other tax relief affecting employers and employees, including:

  • Permitting carryover of, or extended grace periods for, unused amounts in healthcare and dependent care flexible spending arrangements for plan years ending in 2020 and 2021 (among other relief for such arrangements)
  • Temporarily permitting a full deduction for 2021 and 2022 business meal expenses for food or beverages provided by a restaurant
  • Extending through 2025 the CARES Act wage exclusion for amounts permitted as employer-paid student loans under IRC Section 127 plans
  • Extending through 2025 the IRC Section 45S income tax credit for paid family and medical leave (Read about the credit)
  • Permitting distributions from qualified retirement plans to working employees who are age 59 1/2 (age 55 for employees in certain building and construction industry plans)
  • Temporary relief from qualified plan partial plan termination treatment for any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020

Next steps

Employers should consult with tax advisers to evaluate eligibility for and implementation of the various relief. Rules preventing use of the same wages twice between various credits and PPP forgiveness require careful application. Certain relief, even though immediately available, requires plan amendment within a stated deadline. Expect the U.S. Department of the Treasury and IRS to provide guidance on the various relief and open questions.

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Tim Daum
Principal, Washington National Tax