- Two tax provisions of the $2 trillion stimulus package could put cash back into small business owners' pockets almost immediately.
- Most businesses will be eligible to defer payroll taxes and receive tax credits for keeping employees.
- However, businesses may not be eligible for tax relief if they receive a forgiveable loan through the Paycheck Protection Program.
- To understand how business owners can take advantage of these programs Business Insider reviewed IRS guidelines and spoke with a small business advisor at Wiss & Co. accounting firm.
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Businesses that have been forced to close, limit operations, and lay off employees during the coronavirus pandemic have several lifelines available to them, two of which are tax-related and could put cash back in their pockets almost immediately.
Rather than waiting to be approved for emergency loans and grants, most businesses will be eligible to defer payroll taxes and receive tax credits for keeping employees on payroll. These provisions are part of the $2 trillion stimulus package the US government signed into law to assuage the economic fallout from COVID-19.
Designed for private businesses of all sizes, the tax provisions could especially benefit small businesses that have difficulty getting SBA loans.
For example, many venture-backed startups won't be able to access emergency loans and grants from the federal government because the SBA's affiliation rule ties them to other companies and thus increases their employee count. But startups would still be eligible for tax deferment and credits through the IRS.
Business Insider reviewed IRS guidelines and spoke with Travis Miskowitz, a small business and CFO advisor at Wiss & Co. accounting firm, to understand how these programs work.
Here's everything you need to know about getting tax deferment and credits to help your business maintain payroll and increase cash flow.
Payroll-tax deferment
Employers will not need to pay Social Security payroll taxes this calendar year. Instead, they'll pay 50% by the end of 2021 and the other 50% by the end of 2022. As reported by CNBC, the IRS will continue to collect worker's share through paycheck withholding.
This provision is meant to free up cash flow during the current crisis, but those payments aren't going away. Keep in mind that 2020's taxes will be due in addition to full tax payments for the next two years, so you'll essentially have to pay a total of 1.5 times your normal taxes each year. Begin planning and saving for those larger payments as soon as possible so they don't sneak up on you.
How much money: By not paying payroll taxes this year, a business could retain 6.2% of employee wages.
Eligibility: As long as you do not have a loan forgiven under the Paycheck Protection Program, you are eligible for payroll-tax deferral. You can participate in both programs, however you must resume tax payment as soon as your lender deems your loan forgiven. Here's how to decide which option is the best for your business.
How to get it: There's no application process since it's essentially an extension on your 2020 tax-payment deadline. However, Miskowitz said businesses might have to remit those taxes to the IRS on their own and not through their payroll provider. He advises business owners to document everything and keep track of the filing deadlines.
However, some payroll companies have already added tax deferral into their systems. A representative for Justworks told Business Insider that its Social Security tax-deferral tool has returned more than $454,000 in working capital to small businesses which can be used to pay employees as early as their next payroll cycle.
Employee-retention credit
Businesses can receive a 50% refundable tax credit on employee wages after March 12, 2020 and before January 1, 2020. These taxes include federal income tax withholding, the employee's share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes.
"That's designed with the intention to encourage employers to keep most of their employees on payroll to the extent that they can," Miskowitz said. But since the benefits are based on the number of employees you have, he said it most benefits companies with 100 or fewer employees.
How much money: Your total tax credit will depend on your average employee count in 2019.
Companies with 100 or fewer employees will calculate the wages and health care costs paid to any employee during economic hardship, whether or not they are providing services.
Companies with more than 100 full-time employees will calculate the wages and health care costs that would have been paid to employees who are not working, up to 30 days immediately after the period of economic hardship.
All employers can receive no more than $10,000 per employee.
Eligibility: Your business is eligible if you've been forced to partially or fully suspend operations or if you've seen a significant drop in revenue during the pandemic. However, your business is not eligible if you receive a loan through the Paycheck Protection Program.
Miskowitz said that a business must see at least a 50% decline in revenues compared to the equivalent quarter of the prior year - which could mean some companies won't benefit right away. "They may not have experienced that 50% decline in the first quarter, but they'll most certainly experience that 50% decline in the second quarter," he said.
How to get it: To claim the credit, employers will need to report their total qualified wages and health insurance costs on their quarterly employment tax returns, starting with the second quarter of 2020. Most companies will use IRS form 941.
Your business can get immediate access to the credit by retaining your anticipated amount, minus any deposits your company is receiving for paid sick and family leave credit through the Families First Coronavirus Response Act (FFCRA). If your employment tax deposits do not cover the credit in full, the IRS may send an advance payment.
"If they are eligible for an advance payment, essentially a refund of any already paid payroll taxes, they can complete form 7200," Miskowitz said. "The IRS will send them a direct deposit for the amount of that advanced payment if they're eligible."
Editor's note: A previous version of this article stated that a business may not participate in both the Paycheck Protection Program and defer payroll taxes. It has been updated to reflect that businesses may participate in both programs, however a business must resume paying taxes once their PPP loan is forgiven.