Who would have thought that in 2020 we would be navigating foreign territory with a virus that has literally changed the way we do business. With continual news coverage on its effects our US Congress has acted quite significantly in helping small businesses take steps to protect themselves financially.
Before we get into the specifics, it’s important to note that what is discussed in this article is for LLC’s that elected to be treated as an S Corporation for tax purposes. The CARES Act that was passed on March 27, 2020 was meant to help families and small businesses. Like always, Congress uses its ability to tax as a tool to prevent a deepened financial impact on the country at large. So a number of things discussed in this article will be aimed at alleviating the tax impacts on small businesses. So let’s begin…..
Payroll Tax Deferral
Many of the measures put into the CARES Act were aimed at reducing the cost of keeping employees hired at small businesses. So Congress now allows you to defer the S Corp’s share of Social Security tax of federal tax deposits for payroll paid between March 27, 2020 and December 31, 2020.
Fifty percent of these payments will have to be paid by December 31, 2021 and the other fifty percent will need to be paid by December 31, 2022. The best part is the CARES Act allows the S Corporation to defer the portion of social security tax paid on behalf of the owner’s salary as well.
PPP Exception: If your S Corp receives a PPP Loan and qualifies for loan forgiveness, you will not be able to utilize the Payroll Tax Deferral provision.
Loophole: You can defer payments on any payroll paid between March 27, 2020 and the date your PPP Loan originates with the bank funding the loan.
Employee Retention Credit
Your S Corp gets a refundable payroll tax credit against the employer share of employment taxes equal to 50 percent of its wages paid to employees after March 12, 2020 and January 1, 2021.
However there is an exception for this on the wages paid to the following:
- A child, or descendent of a child
- A sibling
- A father, mother, stepfather, and stepmother
- All qualified In-laws to include son, daughter, father, mother, brother, or sister
This is the part of the provision that will we all wanted to see. It DOES NOT prevent you from taking the credit on the owners wages, provided that ONE of the following provisions apply:
- You were issued a government order to fully or partially suspend operation during a calendar quarter.
- Your calendar quarter gross revenue is less than 50 percent of the gross revenue from the same quarter in the prior year.
PPP Exception: If your S Corp receives a PPP Loan and qualifies for loan forgiveness, you will not be able to utilize the Employee Retention Credit provision.
- You can’t defer payroll taxes once your lender has notified you of PPP loan forgiveness.
- You can’t use the employee retention credit if you receive a PPP Loan.
- You can’t use the employee retention credit for family members that work for the business.
Great News: There is plenty of time for you to take advantage of these provisions! If you are a current LLC operating as an S-Corp you need to get with your tax advisor and workout the necessary parts of these legislative benefits provided by the CARES Act. As business owners our success depends on our ability to see opportunity and act on it when the time is right.
If after reading this article you now realize one of the benefits of having a legal business entity formed as an LLC. You have come to the right place to make your LLC official. Simple Start is dedicated to business formation and the many advantages an LLC can provide. This article mentioned that the benefits above have been created for S-Corporation owners. If you are interested in what an S-Corp is and how it functions read The S-Corp Example.
If you are ready to take the next step and become an LLC join us in taking a quick questionnaire that will only encompass 10 minutes of your time. We will do the work, and you will incur the many benefits.