Managing financial decisions for your business can be challenging on a regular day. Throw in a pandemic and it can get downright overwhelming.
Considering the global situation we're going through, I'm going to review some of the new tax laws that were put in place to help reduce the number of layoffs that companies are forced to make to survive the pandemic. Also, I'm going to review how to best apply this legislation when making personnel decisions, in order to maximize both employee and employer benefits.
Does your Business Qualify?
First, you need to prove your business qualifies. To do so, your business must have been "financially impacted by COVID-19." There are other restrictions based on the size of your business and the number of employees. For questions on if you qualify, review the IRS FAQs here.
For the businesses that qualify, you are eligible to receive a 50% credit for qualifying wages and benefits paid to eligible employees for up to $10,000 in wages and benefits per employee.
That is up to a $5,000 credit per employee!
Employers can take a loan against the employer portion of your FICA expenses paid to the IRS to help with cash flow. Qualifying wages paid to employees include:
- Wages paid to an employee who isn't working (shutdown pay, salary continuation, furlough pay, etc.),
- Any vacation pays an employee elects to take due to reductions in work hours.
Also, the employer portion of any benefits for the employees would count towards the $10,000 limit as well. These would include employer insurance premiums paid while employees are not working.
In addition, you are able to take advantage of the FICA loan by reducing the number of payments made to the IRS for the employer portion of social security benefits (6.2% of taxable payroll).
This would be a deferred payment loan, as you would have to pay it back later. You would report this amount on your quarterly 941 (a new form will be available for the second quarter of 2020).
The benefit to the loan is that there is no limit to the amount that you defer, and you have 2 years to pay it back! 50% of the loan will be due by 12/31/2021, and the remaining 50% is due by 12/31/2022. This is designed to help businesses with their cash flow needs for payroll during the pandemic.
How can we use these credits to manage our workforce and reduce the impact on our employees?
Let's review our options!
If you need to reduce the amount of staff working due to reduced demand, you could continue to pay the employees who are not working and claim 50% of that payroll as a credit.
This would mean that your business would only have to cover 50% of the cost and still be able to keep the employee. It also means it will keep that employee from claiming unemployment and potentially increasing future payroll costs.
When you make your 941 tax payment, you could choose to reduce or remove the Employer Portion of Social Security amount and take this as a loan due over the next 2 years.
This amount would then be available to cover the cost of the payroll for employees not working. However, some employers aren't able to pay all of their employees during downtime.
What options are available to them?
While each case is different, there is one underlying driver for these decisions. The employer wants to protect the company's going concern, while also caring for their displaced employees. If multiple people are working the same job, you could rotate time off without pay. If you continue to pay for the employer side of benefits while employees are furloughed, those benefits could count towards the credit and will get you 50% back.
Employers that are still working but with reduced production could continue to pay employees 40 hours a week while only requiring them to work a partial week. For each hour an employee is paid and not working, those wages would count towards the credit.
You can see that there is no set answer, and each employer and employee situation is different. But understanding every available resource will help you make the best decision, that benefits both the employee and the employer.
Many companies are adjusting to the new reality. Check out this special web page we developed to gather some resources you can leverage to deal with emerging challenges.
If you have questions about how to implement any of these tips at home or in your organization, we're here to help. From job board optimization, social media strategy, and applicant communications, we have the team to help you get the job done, during times of crisis and always.