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CARES Act – Payroll Tax Provisions

Lilly Bruere Godfrey

March 31, 2020

The Payroll Tax Provisions included in the CARES Act provide opportunities for employers to reduce and defer payroll tax obligations and potentially obtain a refund resulting from wages paid during the COVID-19 crisis.

Employee retention credit for employers subject to closure due to COVID-19

This provision provides “eligible employers” a refundable credit against their 6.2% employer component of Social Security payroll tax. The credit is equal to 50% of “qualified wages” paid to employees from March 13, 2020 through December 2020.  The maximum credit amount is $5,000 per employee.

What businesses are “eligible employers”?

Eligible businesses include profit and nonprofit employers, whose:

  • Business operations were fully or partially suspended due to the COVID-19 related shut-down order, or
  • Business operations remained open, but gross receipts declined by more than 50% when compared to the same quarter in the prior year until the business has a quarter where it has recovered, defined as gross receipts exceeding 80% of the same quarter in the previous year.

Employers receiving Small Business Interruption Loans are not eligible.

What are “qualified wages”?

For employers who had more than 100 average number of full-time employees in 2019, only the wages of employees who are paid during a shutdown or face reduced hours as a result of their employers’ closure or reduced gross receipts are qualified wages.

For employers who had an average number of full-time employees in 2019 of 100 or fewer, in addition to wages paid during a shutdown or reduced hours, qualified wages also include amounts paid to all employees due to reduced gross receipts.

Qualified wages are capped at the first $10,000 in wages paid to an eligible employee for all quarters.

Qualified wages include expenses paid or incurred to provide and maintain a group health plan allocated on a pro rata basis.

Qualified wages paid by commonly controlled entities will be treated as one employer.

Qualified wages do not include amounts considered for credits received under Emergency FMLA Expansion Act and Emergency Paid Sick Leave Act.

Delay of payment of Employer Payroll Taxes

This provision allows all employers regardless of size, and self-employed individuals to postpone payment of their employer share of Social Security tax for payroll tax deposits required to be made between March 27, 2020 and December 31, 2020.

The provision requires that deferred tax deposits be paid in two equal installments due December 31, 2021 and the other half December 31, 2022.

  • What employment taxes qualify for the deposit deferral?
  • Applies to employer’s share of 6.2% Social Security tax on employees’ wages
  • Does not apply to employer’s share of Medicare taxes
  • Does not apply to the employee’s share of Social Security, Medicare taxes or federal withholding
  • Applies to half of the self-employment tax of sole proprietors
  • Does not apply to employer taxes on wages paid by employers receiving loan forgiveness through the expanded SBA coverage Paycheck Protection Program.

The IRS is expected to revise Form 941, Employer’s Quarterly Federal Tax Return, to track the deferral of tax deposits.

To review other provisions from the CARES Act, click here.

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