Recent Tax Law Changes, Part One
COVID-19 has resulted in number of law changes. The Internal Revenue Service has issued and continues to issue guidance for complying with these law changes. The following is quick overview, as of the first week of May, of those recent changes related to wages.
Wage Credits - Sick Pay
An employee who is unable to work (including telework) because of coronavirus quarantine or self-quarantine or has coronavirus symptoms and is seeking a medical diagnosis, is entitled to paid sick leave for up to ten days (up to 80 hours) at the employee’s regular rate of pay, or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $511 per day, but no more than $5,110 in total per employee.
Family Leave
An employee who is unable to work due to caring for someone with coronavirus is entitled to paid sick leave for up to two weeks (up to 80 hours) at two-thirds the employee’s regular rate of pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, up to $200 per day, but no more than $2,000 in total per employee.
An employee who is unable to work because of a need to care for a child whose school or place of care is closed or whose child care provider is unavailable due to the coronavirus, is also entitled to paid family and medical leave equal to two-thirds of the employee’s regular pay, up to $200 per day and $10,000 in total. Up to ten weeks of qualifying leave can be counted towards the family leave credit.
The law also provides for sick leave incurred by a self-employed person by treating the self-employed person both as an employer and an employee for credit purposes. Thus, with some limits, the self-employed person is eligible for a sick leave credit to the extent that an employer would have earned the payroll sick leave credit if the self-employed person were an employee. This could be an easily overlooked benefit for some “Schedule F” filing ranchers.
Wages paid after March 31, 2020, and before Jan. 1, 2021, are eligible for the sick and family leave credits. Make payments accordingly at year end. To avoid double dipping, sick pay and family leave payments are not subject to the employee retention credit. However, there is a nine-day window, March 13-31, were the wage credit should apply to sick pay since there would be no double dipping for those payments. This is another question that needs answered by the IRS.
Employee Retention Credit Available for Many Businesses
The amount of the credit is 50% of qualifying wages paid up to $10,000 in total per employee. That is a $5,000 maximum credit per employee. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for this credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care. Self-employed ranchers are not eligible for the credit with respect to their own self-employment earnings under current rules. However, if a rancher uses a legal entity and is treated as an employee by that entity in its trade or business that otherwise meets the Eligible Employer requirements, then the entity may be eligible for the credit with respect to his and the entity’s other employee wages. Qualifying wages are based on the average number of a business's employees in 2019.
The credit is not intended to help to expand an operation.
Per the IRS notice 2020-62 the retention credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans (PPP loans). The business must fall into one of two following categories to be a Qualifying Employer:
The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter (which would not apply to most ranch operations)
The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter. (This could apply to many ranchers depending on their individual facts and management of their operations.)
These measures are calculated each calendar quarter and forth coming aggregation rules will apply.
Also. in the IRS’s response to frequently asked questions they stated, “if a tribe or tribal entity operates a trade or business, the tribe or tribal entity may be an Eligible Employer for purposes of the Employee Retention Credit, if it otherwise meets the requirements for the Employee Retention Credit. Additional information will be forthcoming regarding the determination of qualified wages for, and application of the aggregation rules to, these employers.” We will continue to monitor these forthcoming rules for our Seminole friends
Different rules apply to small verses large operations. If the employer had 100 or fewer fulltime employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit. This will apply to most ranchers that meet the test as a Qualified Employer. However, under forthcoming aggregation rules, if the aggregated employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit. Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter.
If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Other Info
To avoid paying mandatory sick leave to employees, there is an administrative exemption which may apply for less-than-50-employee businesses that the “sick leave” mandate puts in jeopardy. This will have to be documented by the rancher and meet criteria set forth by the Department of Labor. Since sick leave payments under the mandate are refundable credits it makes sense to not claim the exemptions unless you simply cannot secure the cash to make them.
If a firm takes a loan through the Small Business Association (SBA) PPP loans, it is not eligible to take the 50 percent of employee wages payroll tax credit but can still take the sick leave credit.
Summary
This is a very summarized overview of the government’s actions related to helping businesses with their payroll obligations during the COVID-19 epidemic. Remember cash is King preserve as much as you can. There are many unknowns that will be addressed over time. Some law changes require quick action and the rules are complicated. Many actions need to be taken before year end. Review your facts to see if your operation may qualify for the employee retention credit. Manage your revenue streams and disbursements accordingly. The test is on a quarter by quarter bases. The employee retention wage credit is not available to employers receiving PPP Loans. Decision must be made to get the PPP loan, if possible, (basically a grant) or take the wage credit Also, the law change allows taxpayers to defer paying the employer portion of certain payroll taxes through the end of 2020. Do not delay addressing these opportunities. Your tax adviser should be able to help you navigate these changes in the law so you arrive at the best answer for your operation.