In what seems a long time past, yet was actually only three weeks ago, Congress enacted the Families First Coronavirus Response Act (FFCRA) that includes Emergency Family and Medical Expansion Act and The Emergency Family and Medical Leave Expansion Act. The legislation, largely administered by the Department of Labor, provides payroll tax credits to employers in order to ease the burden of new provisions requiring certain paid leave for employees due to COVID-19. However, recognizing that funding paid employee leave is only the tip of the iceberg for businesses fully or partially suspended across country due to COVID-19-related governmental orders, Congress passed the broad-sweeping stimulus bill Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on Friday, March 27. The 100% payroll tax credit for qualified leave and 50% payroll tax credit for employee retention for small employers (fewer than 500 employees), as well as payroll tax deferral for businesses (regardless of size) will assist businesses in weathering the COVID-19 storm. Discussed below, the IRS recently clarified a question concerning many employers, whether a company may participate in the Paycheck Protection Loan Program (PPP) and still receive the deferral benefit.

Interpretations of this legislation are rapidly evolving as the IRS, the Small Business Administration and other agencies release piecemeal guidance almost on a daily basis. Subsequent guidance may supplement or contradict some of the information in this article. Still, business owners need to know how to take advantage of these tax changes now. The following discussion provides a summary of the important tax provisions affecting businesses and insights into applying these provisions to maximize immediate benefits for employers.

The Families First Coronavirus Response Act

One-hundred percent tax credit for qualified leave broadly defined wages. Beginning April 1, 2020 and running through December 31, 2020 (, the FFCRA requires businesses with less than 500 employees to provide ten days of paid leave for their ill employees due to COVID-19 or to care for a family member ill with COVID-19 (“qualified sick leave” ( The Emergency Family and Medical Expansion Leave Act provides required paid family leave for an employee unable to work (or telework) due to the need to care for the employee’s child(ren) in the case of school and childcare provider closures due to public health emergency (“qualified family leave” (

For information on the leave requirement and other provisions of FFCRA, please see these Waller blog posts:

  •  The IRS quiets skepticism of government paying COVID-19-related paid leave, but limits qualified family leave (
  •  Only one hour to read and determine responsibilities under the FFCRA? A practical primer of what employers need to know now (
  •  How to document leave requests and tax credits under the FFCRA (
  •  Department of Labor issues extensive guidance on the Families First Coronavirus Response Act (FAQ) (

The government intends to fund this extensive paid leave mandate through a refundable employer tax credit against employers’ payroll taxes. The FFCRA provides a 100% tax refundable credit for the amount of qualified sick leave and qualified family leave wages earned during the applicable period, beginning April 1, 2020 and ending December 31, 2020, up to the statutory amounts of $511 per day or $200 per day as the case may be (“qualified leave credit”). The qualified leave credit will be increased by the cost of any qualified health benefit plan allocable to such employees and the employer share of the Medicare taxes paid on such qualified leave wages, equal to 1.45% of wages. The qualified leave credit can be used for employer-paid Old Age Survivors and Disability Insurance (OASDI) taxes, reduced by any credits allowed for the employment of qualified veterans and research expenditures of the qualified small business for the calendar quarter on wages paid to all employees. In order to prevent an employer from receiving both a deduction and a credit, the credit is taxable income to the employer, which generally offsets the deduction for the wages. Further, an employer cannot claim a credit under Code Section 45S with respect to qualified sick leave wages eligible for the credit but any additional sick leave wages may be eligible for inclusion in Code Section 45S credit calculation.

Unlike the employment tax credit of the CARES Act, discussed below, self-employed individuals can utilize this 100% refundable credit computed on the basis of the self-employed’s own Self Employment Contribution Amount ( (SECA) with similar qualification and amounts equivalent to that available to employees. The self-employment income of the owner can generate a qualified leave credit whereas, as discussed below, a self-employed person cannot obtain the CARES Act’s employee retention credit (defined below) towards payment of his or her wages, only for employees. However, a self-employed person’s qualified leave credit will be reduced by the amount of qualified leave wages it receives from an employer.

Further, the IRS announced a surprisingly aggressive interpretation of qualified leave credit that permits the employer with respect to qualified leave to retain both the employer and employee portion of FICA and withheld federal income taxes to the extent of its payment of qualified leave wages, not just the employer portion of OASDI ( This was generous and broader than the original wording of the statute contemplates, but brought good news for employers. The CARES Act subsequently codified this interpretation by amendment to the FFCRA. If the retention amount is insufficient to provide funds for qualified leave wages, rather than requiring employers to wait to claim the refund on the quarterly employment tax form, Congress amended the FFCRA to allow employers to apply for qualified leave credit advances of the credits on Form 7200, which the IRS has promised to process within two weeks starting in April. These efforts show that the government intends to provide employers upfront cash to pay for qualified leave wages via the qualified leave credits.


Deferral of Employer’s Employment Tax (6.2%). Section 2302 of the CARES Act defers the payment of the 6.2% employer-share of OASDI taxes for employers large and small alike (with exceptions, discussed below). One-hundred percent deferral of such payroll taxes is effective on the date of enactment, March 27, 2020, due to be deposited in the 2020 deferral period and ending December 31, 2021 (the “tax deferral period”). Fifty percent (50%) of such deferred amount is due by December 31, 2021 and the remaining 50% is due by December 31, 2022. For the self-employed (including members of limited liability companies taxable as partnerships, partners of partnerships and self-employed individuals), 50% of the SECA tax attributable to the deferral period of self-employed income) is likewise deferred as determined at the self-employed person level. Self-employed persons must remit the 6.2% tax conceptually equivalent to the employee-share of the OASDI tax on non-deferred quarterly dates, via their quarterly estimated income tax payments, and will defer the 6.2% tax conceptually equivalent to the employer-share of OASDI taxes. Self-employed payroll deferral for a self-employed individual’s employees follows the same timeline as employer payroll deferral, discussed above.

The statute provides for no delinquency and no penalty if the payroll taxes for the payroll tax deferral period are made not later than the applicable date (50% December 31, 2021 and 50% December 31, 2022). The present remittance machinery will permit funds to be deposited on or before the respective December 31st dates, but a new or revised form may be necessary to report the deposit as there are no employment tax returns due on December 31, and the existing deposit forms do not contemplate this sort of deposit. For proprietorships without employees and for partners or members of limited liability companies taxable as partnerships, either a new process will have to be developed for payment and reporting of the OASDI amount for the individual or the IRS may need to permit the individual to make the payment with the fourth individual estimated tax payment. For the self-employed, it may be possible that normal rules will apply and a portion of such tax for the individual partners can be deferred until April 15 under the normal rules. No penalties are applicable if such deferred amounts are timely remitted.

As described below, this deferral of payroll taxes interacts with the 50% employee retention credit and to a limited extent with the PPP loan program to assist the cash flow of the employer during a period of general economic stress. This deferral ability is automatic. Although IRS guidance is likely forthcoming, the statute does not include any requirements to be eligible for deferral other than being in business and paying employees or, for the self-employed, generating self-employed income. The deferral means that as the employees are paid, the 6.2% employer portion of the OASDI tax is not paid. Ultimately, the employer/self-employed person is required to pay the deferred employment tax on the applicable payment dates of December 31, 2021 and 2022.

The IRS has finally clarified that the bar on deferral for employers participating in PPP only begins once the employer receives a decision from the lender that its indebtedness is forgiven under the SBA! The draft instructions for Form 7200 state “Employers who receive a Small Business Interruption Loan under the CARES Act can’t claim the employee retention credit.” However, in an April 10 FAQ ( from the IRS, the government said an employer who has received a PPP loan can still defer the deposit and payment of the employer’s share of OASDI tax without penalty through the date the lender issues a decision to forgive the loan. Half of the amount deferred prior to the issuance of the decision to forgive the loan will be due on December 31, 2021 and the other half December 31, 2022.

Under the PPP, the SBA or certain financial institutions make a 2-year loan (the statute permits a loan for up to 10 years, but the SBA had indicated the loan will be for 2 years with an interest rate of 1%) to employers with less than 500 employees for the payment of wages, rent and utilities as a result of COVID-19 disruption. All or a portion may be forgiven if employees are not terminated and, for those making less than $100,000 per year, their compensation is not reduced by more than 25%. Under the statutory language, an employer can participate in the PPP, defer the employer’s employment tax obligation and participate in the employee retention credit program, so long as the participant does not take advantage of SBA loan forgiveness, although why a business would do so is unclear. We believe that any employer participating in the PPP will want to take advantage of the loan forgiveness option.

For additional information on the PPP loan program, please see these Waller blog posts:

  •   (
  •  How to apply for an SBA Paycheck Protection Program loan (
  •  SBA issues further guidance concerning the Paycheck Protection Program (

The CARES ACT “Employee Retention Credit.” As discussed below, utilizing a payroll tax credit mechanism similar to qualified leave credit described above, the CARES Act gives certain employers a refundable credit equal to 50% of “qualified wages” with respect to each employee with qualified wages for the applicable calendar quarter (the “employee retention credit”) up to $10,000 of qualified wages for each employee for the cumulative total of all calendar quarters. This refundable employee retention credit is available for any employer irrespective of its size. Like the qualified leave credit, the employee retention credit is reduces the 6.2% employer portion of OASDI tax and is computed on the quarterly employment tax return.

On March 31, 2020, the IRS released instructions ( for Form 7200, providing that employers could “include withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees” in its retention amount towards the employee retention credit. Additionally, employers are allowed to request advance payment of the employee retention credit if the retention amount does not cover qualified wages on the Form 7200, although the statute does not explicitly provide for advancing the employee retention credit. Unfortunately, the instructions for Form 7200 also state: “You can’t request an advance payment of the credits for sick and family leave for self-employed individuals. Don’t use Form 7200 for those credits.” At this time it is unknown how the self-employed will claim an advance payment of the credits or if it will be permitted at all.

Eligible Employers. The criteria for being an eligible taxable employer is any employer carrying on a trade or business during calendar year 2020 and (i) with respect to any calendar quarter during which there is a segment of time in which the business operation is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 or (ii) for the calendar quarter in which gross receipts for such quarter are less than 50% of the gross receipts for the same calendar quarter of the prior year and after starting, ending the calendar quarter following the first calendar quarter in which the gross receipts of such employer are greater than 80% of the gross receipts for the same calendar quarter in the prior year.

Employers operating in 2020 that have a Code Section 501(c) status and are exempt from income tax under Code Section 501(a) are eligible employers for any calendar quarter during which there is a segment of time their operation is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.

Qualified Wages. Qualified wages are measured by each employee (not aggregate employees) and cannot exceed $10,000 for each specific employee for all calendar quarters. An employee must qualify as an “eligible employee” for such employee’s wages qualify for the credit, and each employee’s wages are individually capped at an aggregate of $10,000 that can be counted toward the Employee Retention Tax Credit. To illustrate, X has 200 employees to whom it pays $2,000,000 during the relevant quarter. X cannot apportion or artificially smooth out the $2,000,000 of wages paid among its employees to determine qualified wages. If X paid 100 employees each $5,000 quarterly and 100 employees each $15,000 quarterly, then X paid $1,500,000 in qualified wages even though X paid $2,000,000 of wages. While this simplistic example does not account for qualified health plan costs attributable to the period apportioned to each eligible employee, discussed further below, one can see the inability to offset high-wage employees’ wages in order to maximize credits. If the dislocations created by COVID-19 continue for an extended period of time, the wages for fewer and fewer employees will be supported by the employee retention credit, starting with higher paid employees. In addition, qualified wages of an individual for a period cannot exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.

Qualified Wages for Employer with Average Number of Full Time Employees in 2019 Greater than 100. For eligible employers with an average of over 100 full-time employees in 2019 as determined under Code Section 4980H, qualified wages are wages paid to an employee who is not providing services due to the governmental orders. For businesses in this band, rather than having all or a great number of the employees working at less than full capacity each day, it would be more economical and perhaps efficient to have a few employees working at full capacity while other employees do nothing. The work can be rotated among the employees, but a small amount of work by an employee in a day will produce compliance complexity and could prove to be expensive. However, according to the Senate Finance Committee FAQ ( the retention credit is permitted for the portion of the day the employee is not working due to COVID-19 effects. While the governmental orders are outstanding, the assignments and rotations should be carefully documented and clear instructions for others to stand down all or portions of particular days or weeks should be preserved.

Qualified Wages for Employer with Average Number of Full Time Employees in 2019 of 100 or Less. For eligible employers with an average of 100 or fewer full-time employees in 2019, qualified wages are wages paid in any quarter in which there is a segment of time in which a government order is in effect or the employers are impacted by the reduced gross receipts. All wages paid to their employees are qualified wages.

Increase in Qualified Wages for Purposes of Credit Determination. Obviously in a pandemic, the maintenance of health insurance is very important to both the individual and to society. “Qualified wages” includes an allocable share of the eligible employer’s qualified health plan expenses (generally plans which are excluded from the gross income of employees) allocable to the eligible wages. Except as otherwise provided by regulations, the allocation will be treated as properly made if made on the basis of pro rata among employees and pro rata on the basis of periods of coverage relative to the period such wages relate. According to the instructions to the Form 7200, qualified wages include qualified health plan expenses allocated to the qualified wages, but do not include wages for which the employer receives a credit for sick of family leave under the Families First Act.

Reduction in Qualified Wages. Wages for which the employer is receiving credit under sick leave or family leave under the FFCRA, as briefly discussed earlier, do not count. The federal government is already providing an employment tax credit to employers under those rules. However, the employer with over 100 full-time employees should utilize the qualified leave credits when possible as they are 100% credits whereas the employee retention credit is 50%. Even when both credits are 100%, it is more likely the retention credit can be used in the future than the sick leave or family leave credit, so using the sick leave or family leave credit first may be prudent if both credits could apply.

Reduction for Certain Other Credits. There are other credits for which the Treasury or IRS will issue rules reducing the eligible wages or credits in a manner similar to the rules discussed above. These include the Indian employment credit; differential wage payment credits; paid family and sick leave credit; work opportunity credit; and empowerment zone employment credit. The work opportunity credit is widely used in the restaurant business.

Qualified wages are reduced by family and medical leave wages for which an employer claims a credit under Code Section 45S. Additionally, qualified wages are reduced by those generating qualified leave credits. The CARES Act reduces the employee retention credit qualified wages for the quarter by the wages taken into account under qualified leave credit in such quarter. The reduction prevents double dipping with the same wages, not reducing the maximum amount of credit available under each program.

Ineligible Employees. Employees (and presumably the wages paid to such employees) generating the work opportunity credit for the employer in the period the employee retention credit is being determined are disregarded for all purposes. The wages of employees and his or her family that directly, indirectly or constructively own or are deemed to own 50% of the stock by value of a corporate employer or 50% of the capital and profits of a partnership or limited liability company treated as a partnership are disregarded. To determine ownership, the constructive ownership rules of Code Section 267(c) apply. Ownership attribution flows to the owners of entity shareholders or partners, beneficiaries of a trust, the grantor of a trust. Although unclear, it does not appear such persons are excluded from determining the number of workers for the 100 employee threshold discussed earlier herein. Similar rules apply to the grantor of trusts and the beneficiaries of trusts and estate that directly/indirectly or imputably have the requisite ownership of the business. The family attribution rules for ownership could disqualify the wages paid to a number of family owners of small businesses.


Businesses eligible for both the government loans and the credits have choices to make. While the qualified leave provisions apply to employers with less than 500 employees regardless of whether they avail themselves of the PPP loans from the SBA, the deferral of employer OASDI taxes and the retention credit appear not to be available to such employer if a PPP loan is obtained. Employers should anticipate these decision points and choose carefully. Obviously, a PPP loan and loan forgiveness, if available, has greater benefit than the employee retention credit and payroll deferral. It is widely anticipated that the appropriation to the Small Business Administration for the PPP loans will be quickly exhausted. Secretary of Treasury Steven Mnuchin has indicated that if such amount is exhausted he will push for a larger appropriation. Nevertheless, eligible employers should apply as quickly as possible.

As the United States economy almost shuts down for COVID-19, employers are under unimaginable cash flow strain. For many, retaining employees and paying their wages will be almost impossible. While the IRS has taken an extremely taxpayer-friendly approach to the tax provisions of the FFCRA and CARES Acts, these solutions are still fingers in the dike for many. Even the short-term effectiveness of the employee retention credit and the deferral of at least a portion of the employment tax is dependent on the IRS’s implementation of the statute and the speed at which refunds of the employee retention credit can occur and/or the banks offer loans against the future credit refunds. The IRS will surely need additional funding and resources to implement such lofty plans. For many small and even large businesses the clock is running. It may be too little, and for many too late.