All the trillions of dollars of tax cuts, loans, and payment postponements enacted by Congress are providing much-needed medicine to counter the macroeconomic shock delivered by the coronavirus pandemic. But the details are numerous and complicated.
That complexity is worrisome. Consider that one month ago about 15 million were employed in restaurants. Out of those millions, 90 percent were with businesses with fewer than 50 employees. With sales revenue either eliminated or significantly reduced, owners of those small businesses must quickly decide about layoffs (over and above existing layoffs).
Remember, for those providing carryout and delivery, this is in addition to dealing with crisis-heightened health and hygiene requirements. If the owners of those businesses can quickly learn if, when, and how much relief is available, perhaps the distress of massive restaurant unemployment can be reduced. But if this critical information isn’t clearly, quickly, and widely conveyed, much of the potential benefit of enacted legislation will be muted.
There are at least six major provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) and the Families First Coronavirus Response Act (P.L. 116-127) that directly affect employment decisions, as outlined in the adjacent table and described below.
| Paycheck Protection Program (PPP) (SBA Loans/Grants) | Loans to Large Businesses From Treasury Exchange Stabilization Fund | Payroll Tax Credit for Sick and Family Leave (Families First Coronavirus Response Act) | Postpone 2020 Payroll Taxes Until 2021 and 2022 | Employee Retention Tax Credit (ERTC) | Expanded Unemployment Insurance |
|---|---|---|---|---|---|---|
Injection of stimulus | $376 billion (Loans. Can be forgiven) | $500 billion | $105 billion | $350 billion (in CY 2020, then paid back in CY 2021-22.) | $55 billion | $260 billion |
Employer must retain employees? (Details vary.) | Yes, if loans to be forgiven. | Yes. (No forgiveness in any case.) | No. | No. | Retain employees required. | NA |
Some details | For businesses with fewer than 500 employees (rules flexible on employee count). Maximum loan: $10 million or percentage of payroll. | For large, distressed businesses. (Special allocation to air and defense.) | Credit fully compensates mandate up to $511 or $200 per week per employee for 2 weeks of sick leave. $200 for following 10 weeks of family leave. | No conditions. | 50 percent tax credit on first $10,000 of employee compensation. (Businesses with significant reduction in sales revenue.) | Expands amount of weekly payments; expands duration of payments; expands unemployed who qualify. |
Interactions | Disqualifies for payroll tax postponement and ERTC. |
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| Not available to employer in PPP. | Not available to employer in PPP. Not available for wages eligible for work opportunity tax credit. |
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Small business loans/grants from the SBA (Paycheck Protection Program). If a business has 500 or fewer employees, it may be eligible for a loan from the Small Business Administration (using banks and other financial institutions as intermediaries). The maximum loan amount is the lesser of (A) $10 million, or (B) 2.5 times monthly payroll costs. Very importantly, the loan is forgivable if employment levels are maintained. There are complicated rules about the 500-employee threshold, qualified payroll costs, and eligibility for forgiveness.
Loans to large, distressed businesses. Distressed businesses (including specifically those in the airline and defense industries) that don’t qualify for small business loan relief can qualify for loans from Treasury’s Exchange Stabilization Fund. Those loans may not be forgiven. Among conditions for qualification are no dividends, no stock buybacks, limits on executive compensation, and maintenance of employment levels through September 30 equal to 90 percent of the March 24 level.
Employer payroll tax payments postponed. Payroll tax payments due in 2020 for the employer portion of Social Security (Old-Age, Survivors, and Disability Insurance) tax and one-half of self-employed individuals’ Social Security (Self-Employment Contributions Act) tax, equal to 6.2 percent of taxable wages in either case, are postponed. One-half of the amount postponed is due before the end of 2021, and the other half before the end of 2022.
Refundable employee retention tax credit. An employer whose operations have been suspended by a government authority or who has experienced a 50 percent decline in sales receipts can receive a refundable 50 percent payroll tax credit for wages of up to $10,000 per year per employee. (So a maximum credit of $5,000 per employee.) For an eligible employer with fewer than 100 employees, the credit applies to the wages of all employees. For larger eligible employers, the credit only applies to wages paid to employees who aren’t providing services to their employer.
Refundable payroll tax credit for sick leave and family leave. Under the Families First Coronavirus Response Act, employers with fewer than 500 employees must provide 80 hours (two weeks) of paid sick leave equal to an employee’s pay up to a maximum of $511 per day if the employee is quarantined or experiencing symptoms associated with the coronavirus and seeking a medical diagnosis. The sick leave requirement is reduced to two-thirds of pay with a maximum of $200 per day if an employee is caring for others with coronavirus-related issues. Family leave must be provided for an additional 10 weeks at two-thirds pay with a maximum of $200 per day for an employee caring for a child who is out of school or without day care. Paid leave costs to the employer are 100 percent compensated with a refundable payroll tax credit. Equivalent credits against income tax are available to self-employed individuals.
Expanded unemployment insurance. The CARES Act increases eligibility for unemployment benefits (for example, to the self-employed). It increases the duration of payments (from 26 weeks, in most states, to 39 weeks). And it increases the amount of payments (by $600 per week for four months).
Traffic at the Intersection
These rules on their own are complicated enough. But interactions among them require additional head-aching calculations and decision-making. Specifically, deferral of payroll taxes to 2021 and 2022 isn’t available to an employer participating in the Paycheck Protection Program for small businesses (section 2303(a)(3) of the CARES Act). Nor is the employee retention credit available to an employer participating in the Paycheck Protection Program for small businesses (section 2301(j)). And any wages eligible for that employer retention credit aren’t eligible for the work opportunity tax credit (section 2301(h)(1)).
Using simple examples, let’s examine the choice between (1) a small business loan with forgiveness from the Paycheck Protection Program and (2) application of the employee retention credit. Under the CARES Act, it is one or the other.
Example 1. Sandy’s Sandwich has 50 employees (most part-time), all with an average annual salary of $20,000. Sandy can borrow 2.5 times monthly payroll (equal to $83,333 times 2.5) or $208,333. If Sandy maintains employment levels, the entire $208,333 can be forgiven. If instead Sandy opts for the employee retention credit, she will get a refundable payroll tax credit equal to $250,000. Assuming many other conditions are met, Sandy will find the employee retention credit more advantageous than a Paycheck Protection Program small business loan.
Example 2. Erin’s Engineering Services is similar to Sandy’s Sandwiches except Erin’s employees have an average salary of $80,000. In this case, the maximum loan amount is four times larger, or $833,333. All of this amount may be forgiven if there are no layoffs. The employee retention credit is the same as in the prior example, $250,000. Assuming many other conditions are met, Erin will find the Paycheck Protection Program small business loan more advantageous than the employee retention credit.
So, in general, the advantage (if any) of the small business loan program, assuming loans are forgiven, is larger for employers paying higher salaries. The advantage of the small business loan over the employee retention credit is larger if the employer would have to sacrifice the work opportunity tax credit to get employee retention credits. The advantage of a forgiven small business loan is smaller than indicated here if the lost postponement of payroll taxes due in 2020 is taken into account.
This is starting to feel more complicated than section 199A relief enacted as part of the Tax Cut and Jobs Act. Unfortunately, the stakes are greater now than at the end of 2017, and so is the need for speed.
Correction, March 31, 2020: An earlier version of this article gave the incorrect amount for the maximum small business loan. The error has been corrected.