In Part 3 of our 3-part COVID-19 response video series, hear from Jason Peckham, Tax Guard’s VP of Resolutions, how IRS’s Tax Credits impacts small businesses and commercial lenders.
To view Parts 1 & 2 of our COVID-3 Response Series check out our Tax Guard Resources. There you’ll also find our case studies, videos, and infographics!
Please contact us if you have any questions about how these changes at the IRS can affect your commercial lending organization.
Covid-19 Response Video Series – Part 3
Hello, I am Jason Peckham, vice president of Resolutions with Tax Guard. Thank you very much for joining us on our third video in our series on federal payroll taxes. Specifically, this video is dealing with tax credits. I hope this video finds you both healthy and safe. Again, this is our third video in our series on the changes to federal payroll taxes, both from legislative initiatives as well as changes that the Internal Revenue Service announced on their own.
I would encourage you to go back and take a look at our first two videos in this series as well. A little background on Tax Guard. We started Tax Guard in 2009, and there’s two aspects of our service, on the one hand, we monitor tax compliance for businesses that borrow money from banks asset based lenders and other lenders. The idea being the earlier an issue’s identified, the easier it is to resolve, the better the outcome, the more likely we are to preserve funding. On the back end,
the second part of what we do is that when issues do arise, we can jump in and resolve them, usually through an installment agreement and another document called the Subordination of Federal Tax Lien. Currently, we work with about 400 different banks, asset based lenders and other lenders from across the country. In terms of the payroll tax issues, there’s three broad categories of these changes, and it’s probably easiest to think about these in terms of questions that I’ve been getting from lenders over the last week or two.
For example, I’ve heard businesses don’t have to pay payroll taxes moving forward. Is that correct? And the answer is no. A limited amount of the payroll taxes can be deferred. It’s the employer matching portion of Social Security, otherwise the rest, the taxes need to be paid in full and on time. We address that issue in the first video relative to the deferral of payroll taxes. Is the Internal Revenue Service really shut down for 90 days?
And the answer to that question is no.
The collections division is up and running, the revenue officers and group managers and everyone else that we work with to to secure resolutions.
They’re working from home. They’re up and running. Now, there are some limitations, obviously, but generally speaking, they’re up and running. And we address those concerns in the second video where we address the People’s First Initiative from the Internal Revenue Service. These changes are coming fast and furious, if not hourly, they’re at least changing on a daily basis. So, for example, we recorded the second video on April 8th. A day or two later, the Internal Revenue Service changed the extension of filing and paying income taxes.
So when we recorded the video, the rule was that extension to file and pay only apply to income taxes due or estimated tax deposits due on April 15th. They’ve since broadened that extension to apply to any income tax return or estimated tax deposit due between April one and July 15. That return or that payment can now be made on July 15th without penalty. But again, they’re going to change again and we’ll keep you updated as to any changes moving forward.
The last question is, what are these payroll tax credits we keep hearing about? And that’s our subject of our conversation today in our third video.
But again, I would recommend that if you haven’t already check out the first two videos in this series relative to the deferral on payroll taxes. And the IRS’s people’s first initiative. So the payroll tax credits are created by legislation. The employee retention credit was created by the CARES Act and the Paid Sick and family leave credits were created by the Family First Act. These credits are very complicated. They’re very confusing in large part because they … it is not only taxes that are that are invoked here, but you have rules and regulations and requirements from the Department of Labor that are also brought into play.
So not only should a business well be very tough for them to figure out these credits on their own, they probably need someone who understands employment and labor law as well as someone who’s very good with taxes, a good CPA, a good accountant moving forward.
Congress created these credits with the idea of helping small businesses, but they might be so complicated that they’re they’re not as much value as maybe Congress intended. For our purposes today.
We’re going to take a look at these credits from a 30,000 foot perspective. We’re not going to get into the nuts and bolts of how the returns work. Tax guard doesn’t prepare returns. Instead, what we’re going to do is focus on a high level analysis and give you a general idea of what’s going on so you can identify red flags in the future. When your clients mention to you, hey, we’re trying to take into account some of these credits.
Initially, the employee retention credit, it’s a fully refundable tax credit that applies to the employer matching portion of Social Security and Medicare. It applies to eligible employers who are defined as businesses that had a fully or partially — well they fully or partially suspended operations during the quarter in 2020, or that business experiences a significant decline in gross receipts. Well, that begs the question, what’s a significant decline? Legislation defines that as a 50 percent reduction in revenue or more.
So for example, if a business had a hundred thousand dollars of revenue in the fourth quarter 2019. They would qualify for an employee retention credit if during a quarter in 2020, their revenue slipped below that 50 percent threshold, so they had a revenue for the entire quarter of 50000 dollars or less.
And what any quarters that that that have that that fall below that threshold would qualify for the employee retention credit. And this applies to wages paid essentially between March 13th, 2020 and the end of the year. The credit is equal to 50 percent of qualified wages and the maximum amount of the qualified wages is ten thousand dollars, 50 percent of that is 5000 dollars. So the maximum credit per employee is five thousand dollars. I highly encourage you, if you have additional questions on this to check out, the Internal Revenue Service’s frequently asked questions.
It’s very helpful from, again, high level perspective. There are a couple of points of note. Number one, employers who receive the paycheck protection program or a PPP loan, they’re not eligible for the employee retention credit. These two programs are mutually exclusive. Now, there’s no limit or threshold on the number of employees that can take the employee retention credit, which is important when comparing that to the paycheck protection program, because that program is only available for businesses with 500 employees or less than 500 employees.
So if a business has more than 500 employees, it won’t qualify for a loan, but it could qualify for the employee retention credit. Something else to take into consideration. And there’s no double dipping.
A business cannot use the same wages to claim the employee retention credit and the sick and family leave credits, which we’ll talk about here in a second.
Now, the business could claim both credits, but not on the same wages. So looking at the paid sick leave refundable credits, there’s essentially two different categories of this paid sick leave. Number one is based on illness and it’s available for any employee, regardless of how long they’ve been employed by that business, if they’re unable to work or work from home.
And if specifically they have the coronavirus or they’re caring for someone with the coronavirus. And here, the the maximum benefit is 80 hours of benefit for a total amount of five thousand one hundred and ten dollars. The second category is child care. And really, this is available for an employee who can’t work from or can’t go to work, can’t work from home and has to stay home and care for a child where the school is closed and the caregiver is unavailable because of the coronavirus so that the stay home and take care of a child.
Again, maximum benefit is 80 hours and the total dollar amount is two thousand dollars. So the dollar benefit is substantially less if the employee is staying home to care for a child as opposed to if they have the coronavirus or they’re caring for someone who has the coronavirus.
If we compare that then to the paid family leave refundable credits. This actually extends the FMLA benefits. Again, these are required. Generally, the FMLA benefits are required regardless.
So these apply to wages that the employer is required to pay to an employee who’s unable to work or work from home. Where, again, the employee is caring for a child, where the school is closed or the child care provider is unavailable. To be eligible, though, an employee has to have been on payroll for 30 days prior to taking leave, so you might ask yourself, what’s the difference between the family leave benefits and then the child care benefits from the sick leave?
And the difference really is it’s based on the length of the employment, if the employee is on payroll for 30 days prior to. Prior to two taking leave, they qualify for the larger benefit through FMLA. That’s 10 weeks in a maximum benefit of ten thousand dollars. I think the paid sick leave for the child care is really kind of the idea was to fill that hole for employees who didn’t qualify for FMLA benefits. So both of these benefits, the sick leave and the family leave refundable credits, they’re required by law and it’s in addition to any leave that the business already offers, it only applies to businesses with 500 or fewer employees.
And again, the actual calculation and the return preparation is extremely complicated. If you check out the Internal Revenue Service’s frequently asked questions there’s 66 “basic FAQs”. That’s a lot of basic frequently asked questions. There’s a lot of moving pieces and a complexity to these credits. These credits are claimed on the employment tax returns so the 941 series. They apply to withholding and employer matching portions of Social Security and Medicare. This is unique in all the conversation we’ve had in this video and the first two videos, the paid sick and family leave refundable credits, you can actually offset not only the employer matching portion of Social Security and Medicare, but withholding as well. So it’s a little bit more of a broader benefit. And if there’s not enough taxes to cover all the credits that can be offset, the business can actually apply to the Internal Revenue Service for an advance on those credits by filing a brand new form 7200, the advance payment of employer credits due to the coronavirus.
So what are the takeaways? Again, 30,000 foot perspective. With the employee retention credit, it applies only to the employer matching portion of Social Security only. Remember, it’s mutually exclusive with the PPP loan. You can’t take the employee retention credit and a PPP loan at the same time. And ultimately, I think this credit’s going to be pretty limited. You’re talking about a business that continued to pay its employees despite either shutting down its operations for a quarter or experiencing a 50 percent reduction in revenue.
They continue to operate and continue to employ those employees. You’re not going to have too many businesses that fit into that specific criteria that can essentially do both experience that that economic hardship, but then also turn around and keep their employees on payroll. When it comes to the sick and family credits,
These apply to the withholding and the employer matching portion of Social Security and Medicare. And again, I think these are going to be limited at least fingers crossed. We hope this is going to be limited.
It’s associated with employees who either have the coronavirus or caring for someone in their family that has the coronavirus or they’re on leave because they’re caring for a child who the school is closed and there’s no child care.
Hopefully that’s a very limited set of circumstances and that the businesses you work with, their workforce, you know, don’t experience huge numbers of employees who can’t come into work because either they have the coronavirus or or they’re caring for someone who does. My guess is that it would be, you know, a handful of employees in each business, probably, in which case those credits aren’t going to be widespread. So as a result, when we’re talking about federal tax deposits in the year 2020, businesses should still be depositing the employee portion of Social Security.
In most cases, they’re going to deposit withholding and Medicare as well. So the vast majority of federal tax deposits still need to be made in full and on time. Let me give you an example. So if we’re looking at a Tax Guard report, the liability section shows that on the fourth quarter of 2019, the amount due on that return was about five hundred thirty five thousand dollars. If we use the past to predict the future. So we’re making a guesstimate the amount of deposits should be comparable to that five hundred thirty five thousand dollars figure.
Assuming that the number of employees remains stable on the first quarter of 2020, we’d expect 500000 dollars in deposits. We’re probably short four hundred thousand dollars on that particular quarter. But moving forward, let’s assume that the business either defers the social or the employer matching portion of Social Security. We discussed that in video one, or they’re taking some of the tax credits that we discussed in this particular video, video three. If that’s the case, they should still be expected to deposit 300000, 400000 dollars even with those deferral and credits.
So if you have a client that you’re working with moving forward and you check on the federal tax deposits and the response is we’re not making federal tax deposits. We’re deferring payroll. We’re taking tax credits. You’re going to know that’s a pretty big red flag.
You’re going to look at that a little bit closer because they should have a much bigger, maybe not the entire amount that you would expect prior to to the coronavirus, but they should be making substantial deposits even moving forward.
Again, we’ve discussed these issues from a 30,000 foot perspective, there’s going to be a lot of questions, there’s gooing to be a lot of changes moving forward. That’s what we’re here for. So if you have any questions, by all means, feel free to give us a phone call. We can work through these things together. I appreciate you joining us for our third video on this series. If you haven’t, check out the first and second videos on the deferred payroll credits and the Internal Revenue Service’s, People’s First Initiative.
Again, stay safe and healthy and we look forward to hearing from you in the future.