Despite its many problems rolling out, the Paycheck Protection Program has already delivered billions of dollars of potentially forgivable loans to millions of small businesses across the country and in the area. But the fact is that not every small business that applies will be able to benefit from this program. The good news is that there are at least two new significant tax-driven incentives to help employers maintain their payrolls even if they couldn’t participate in the Paycheck Protection Program.
The first incentive is about payroll tax deferrals.
Thanks to the CARES Act – and whether you’ve been affected by COVID-19 or not — all businesses and self-employed people can defer their federal employer payroll taxes on the 6.2 percent Social Security tax incurred between March 27 and Dec. 31, 2020 until as late as 2022. Fifty percent of the taxes owed would be payable by Dec. 31, 2021, with the balance due by the end of the following year. Remember, these are employer taxes only – you still have to withhold and pay in your employees’ share when due, and Medicare taxes are not eligible for deferral.
For many business owners, the opportunity to save these payments, at least for a while, could be a big boost to their cash flow.
“The way this piece of legislation was designed is that it’s more of an interest-free loan,” Bill Goselin, a compliance analyst at human resources services and payroll processing firm Paychex, told me. “As a business owner, you have to evaluate your own situation and your own needs, but if that money could really help you out right now, then you should take advantage, knowing that you’re going to have to make good on those obligations at a later date.”
Mitchell Gerstein, a senior tax advisor at Bala Cynwyd accounting firm Isdaner and Co. LLC, agrees, but has also been cautioning his clients to be careful when deferring their payroll taxes. “We advised our clients to plan accordingly to ensure they managed their cash flow in 2021 and 2022 when the deferred payroll taxes are payable,” he said. “We all know the old adage, ‘out of sight, out of mind.’”
Although you don’t have to be affected by the COVID-19 outbreak, the deferral program does have restrictions. The most significant is that it can be used only by companies that don’t receive loan forgiveness under the Paycheck Protection Program. However, employer payroll taxes incurred before receiving the forgivable loan would still be eligible.
The payroll tax deferral is helpful. But there’s another payroll tax incentive that’s available under the CARES Act for employers that also don’t participate in the Paycheck Protection Program: a big tax credit that could be a huge cash-flow savings.
It’s called the Employee Retention Tax Credit and, unlike the payroll tax deferral program, it’s specifically targeted at employers that have been “financially impacted” by the pandemic between March 27 and Jan. 1, 2021. Financially impacted companies are those that have been forced to suspend or close their operations or have seen their revenues drop by more than 50 percent compared with the same period last year. Unfortunately, self-employed people aren’t eligible for this deal, although they can participate if they have employees.
The employers who are eligible can take a tax credit of 50 percent of up to $10,000 of each of their employees’ quarterly earnings, including qualified health-plan payments. So, for example, if you have five employees who each earn more than $10,000 in a quarter, you get a $5,000-per-employee credit against the employer’s share of federal Social Security payroll taxes owed, or a $25,000 credit. And if your credit exceeds the amount of your liability, you can ultimately get a check back from the government.
According to Gerstein, the payroll tax credits are "invaluable" for reducing his clients' tax burden. "These credits can go a long way to providing additional needed cash flow during these challenging times," he says, noting how important they are to help companies "maintain their workforce especially if they decided not to pursue a Paycheck Protection Program loan."