What is the CARES Act – Coronavirus Aid, Relief, and Economic Security Act?

Have you heard of the CARES Act which was signed into law on March 27, 2020? CARES, or Coronavirus Aid, Relief, and Economic Security Act is a new law intended to help individuals and small business owners who have struggled financially due to the Coronavirus pandemic.

Learn more about how you can take advantage of the CARES Act now.

What Are the Small Business Elements of CARES Act Legislation?

There are several pieces of CARES Act legislation that impact small business taxes, including:

• The Employee Retention Credit
• Payroll Tax Postponement
• Paycheck Protection Program
• Disaster Loans

Let’s explore each…

1 – Employee Retention Credit (a Payroll Tax Credit)

The Employment Retention Credit is a refundable tax credit designed to help small business owners keep workers on their payroll.

Who is Eligible for the Employee Retention Credit?

Your small business could qualify if:

• You had to fully or partially suspend operations due to a Coronavirus shutdown order
• Your business has declined by more than 50% (compared to the same calendar quarter in the prior year).

What Does the Employee Retention Credit Cover?

The credit allows you to take a payroll tax credit of 50% of qualified wages paid to employees from March 13 to December 31, 2020 for up to $10,000 of qualified wages per employee for a maximum credit of up to $5,000 per employee.

If you:

• Employed 100 or fewer employees: all wages qualify, regardless of whether the business remains open or not.
• Employed more than 100 employees: wages qualify if they are paid to employees you continued to pay, but who weren’t able to do their jobs due to business closure or business loss due to the COVID-19 pandemic.

With this credit, small business owners can claim a credit for  compensation up to $10,000 per employee, including certain health benefits, paid to an eligible employee.

How Does the Employee Retention Credit Work with Other Small Business Provisions?

Under the Families First Coronavirus Response Act you may have to pay mandatory emergency sick leave or mandatory emergency family and medical leave. A credit is also available to help employers cover the mandatory paid leave. Small business owners can’t use the same wages for the Employee Retention Credit and the credit for paid mandatory leave.

Additionally, if you receive an emergency small business loan, you can’t take the Employee Retention Credit.

How Can My Business Obtain the Employee Retention Credit?

While the credit will be reported on your payroll tax return, you do not have to wait until the end of the year to claim the credit. Here are your options:

• Keep the payroll taxes you would normally have to remit up to the amount of the credit. This includes income and FICA taxes withheld from wages and the employer’s share of the Social Security portion of FICA taxes. Then reconcile the amount on your payroll tax return (Form 941) when you file your quarterly return.
• Claim an advance of the credit on Form 7200 even before you pay employees. Then reconcile the amount on Form 941 when you file your quarterly return.
• Claim the refundable credit on your Form 941 to recover payroll tax already paid during the quarter. (Related read: What is Form 941?)

2 – Payroll Tax Postponement

If you own a business that employs people, you can defer the employer’s share of the Social Security portion of FICA taxes (6.2% of wages up to $137,700).

When Is The Deferred Payment Due?

Half of the payment will be due by December 31, 2021. The remaining wages will be due by Dec. 31, 2022.

What’s Not included in the Payroll Tax Postponement?

Payroll taxes not included with the Payroll Tax Postponement:

• The employer’s share of the Medicare portion of payroll taxes (1.45% of wages with no ceiling)
• The employee’s share of Social Security and Medicare taxes

Note that these taxes may be used to cover the employee retention credit and credit for mandatory leave explained above.

Self-employed taxpayers, listen up!  Self-employed individuals, including Schedule C and Schedule F filers can defer one-half of the 2020 Social Security portion of self-employment taxes (6.2% of net earnings up to $137,700) for quarterly estimated taxes.

3 – Paycheck Protection Program (PPP Loan)

With the CARES Act, the U.S. government will offer a small business loan – called the Paycheck Protection Program – to help small business owners with payroll costs and interest payments on their current debt.

Who is Eligible for the Paycheck Protection Program?

Businesses with 500 or fewer employees are eligible to borrow up to 2.5 times their average monthly payroll or up to $10 million.

PPP loans are 100% guaranteed without collateral or a personal guarantee. And, if you use the loan for permitted purposes, the loans may potentially be deferred and some or all of the balance may be forgiven.

What else should I know about these small business loans?

You can use this loan for:

• Salaries for employees (up to $100,000 per employee)
• Certain health benefits
• Mortgage interest, rent and utilities
• Interest on other debts
• Applications for the Paycheck Protection Program loans must be submitted by June 30.

4 – Disaster Loans

Traditionally, these loans are reserved for business in regions declared disaster areas. However, as part of the CARES Act, the disaster loan program is now available to all businesses.

Loans under $200,000 are not required to have a personal guarantee. You can request an advance of up to $10,000 paid out in three days.

What Can I Use the Disaster Loan For?

• Paid sick leave for employees
• Maintaining payroll
• To cover increased operating costs
• Rent or mortgage payments
• Repaying obligations that can’t be met due to revenue loss

Who Qualifies for Disaster Loans?

Any business, cooperative or ESOP with 500 or fewer employees and all sole proprietors, independent contractors and private non-profits.

Where to Go for More Help as a Small Business Owner?

Need assistance with your overall small business tax strategy? Learn more about our bookkeeping, payroll, and tax services at Block Advisors.