UPDATED – Which COVID-19-Related Payroll Tax Credit Is My Business Eligible to Receive? by Cherry Laufenberg, CPA
In the wake of the COVID-19 pandemic, the U.S. enacted various laws providing a variety of financial-relief measures to support businesses through the crisis period. Key among those provisions are tax credits for those businesses that retain and continue to pay qualifying wages to employees despite interruptions or their normal business operations.
It is critical that businesses pay careful attention to ongoing IRS guidance to understand how and if they may qualify for these tax benefits and for what period of time. For example, additional rounds of stimulus signed into law at the end of 2020 and early 2021 extend and in some cases expand the relief measures originally included in the Families First Coronavirus Response Act (FFCRA) and the CARES Act.
Employee Retention Tax Credit
Under the first round of COVID-19 stimulus, private-sector businesses and nonprofits that were able to keep their workers on payroll between March 13, 2020, and Dec. 31, 2020, were eligible for refundable tax credits of as much as $5,000 per employee for the year. Subsequent legislation extended the employee retention tax credit (ERC) through Dec. 31, 2021, and increases the maximum credit amount to $7,000 per employee per quarter, or $28,000 per employee for all of 2021.
Who Qualifies for the Employee Retention Tax Credit?
Businesses qualifying for the original version of the ERC must have continued to pay workers between March 13 and Dec. 31, 2020, despite 1) a full or partial suspension of operations for any quarter of 2020 due to a COVID-19 lockdown order, or 2) a significant decline in gross revenue during any quarter of 2020 compared to the same calendar quarter in 2019. The law distinguished a significant decline in revenue as one in which gross receipts during a quarter in 2020 are less than 50 percent of gross receipts for the same calendar quarter in 2019. Therefore, even essential businesses that voluntarily suspended operations or reduced staff hours could qualify for the ERC provided they met the significant decline in gross receipts test.
Under the latest stimulus package, the ERC is available beginning on Jan. 1, 2021, to a wider swath of businesses including those that are 1) fully or partially suspended by government-mandated business closures through Dec. 31, 2021, or 2) whose gross receipts for any quarter in 2021 are less than 80 percent gross receipts during the same quarter in 2019.
How Do I Calculate the Employee Retention Credit?
The actual amount of the employee retention tax credit available to businesses under the first COVID-19 relief law was equal to 50 percent of “qualifying wages” (including employer-provided health care costs) paid to workers between March 13 and Dec. 31, 2020, up to a maximum of $10,000 per employee, for all calendar quarters. Again, the available credit was capped at $5,000 per employee per year.
Effective Jan. 1, 2021, the credit increases to 70 percent of qualified wages (and health care benefits) paid to eligible workers between Jan. 1 and Dec. 31, 2021, up to a maximum of $10,000 per employee, for all calendar quarters. Therefore, the available credit increases to $7,000 for each of the first two quarters in the new year, or $28,000 per employee for all four quarters.
What is Meant by Qualifying Wages?
Qualified wages are based on a business’s average number of full-time employees in 2019.
Small businesses that had 100 or fewer full-time employees working a minimum of 30 hours per week in 2019 may receive the credit for wages they paid to employees during the period of March 13 through Dec. 31, 2020, regardless of whether those employees actually provided services on those dates. For larger businesses with more than 100 employees, the amount of the credit was limited to wages paid to employees during a period in which those employees do not provide services to the employer. Effective Jan. 1, 2021, the credit will apply to businesses with up to 500 employees, regardless of whether those employees actually worked during the covered period through Dec. 31, 2021.
How Can I Receive the Employee Retention Credit?
While the law does not require businesses to prove that a decline in gross receipts is related to COVID-19, it is recommended that companies maintain appropriate records to document the extent of their losses. To claim the benefit of the credit, businesses may 1) reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit or 2) request an advance of the employee retention credit by submitting to the IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Credits for Qualified Paid Sick and Paid Family Leave
The Consolidations Appropriations Act of 2021 extends the refundable tax credits introduced by the Families First Coronavirus Response Act (FFCRA) for businesses that continue to pay qualified wages and health care benefits to employees entitled to paid sick leave or expanded family and medical leave due to COVID-19 during the period of April 1, 2020, through December 31, 2025. The credit was previously scheduled to expire on Dec. 31, 2020.
Who Qualifies for the Paid Sick and Family Leave Credits?
Businesses must have fewer than 500 full-time and part-time employees in the U.S. and be required under the FFCRA to pay “qualified sick leave wages” and “qualified family leave wages.” Comparable credits are available for self-employed taxpayers who are entitled to receive paid sick and family leave as if they were employees of employers (other than themselves).
For purposes of determining employers’ eligibility for credits relating to “qualified sick leave wages,” employees must be unable to work or telework because they are either experiencing COVID-19 symptoms and seeking a medical diagnosis; subject to coronavirus quarantine or self-quarantine; or caring for someone else with COVID-19 or a child whose school, camp or daycare is otherwise unavailable.
Credits for “qualified family leave” are based on wages paid to employees who cannot work or telework because they must care for a minor child, age 18 or younger, whose school, camp or daycare is closed due to COVID-19.
How Do I Calculate Qualified Wages?
The amounts employers must pay eligible workers for “qualified sick leave” vary depending on such factors as the reason employees are unable to work or telework.
When employees cannot work or telework due to their own health needs, employers must pay them up to 80 hours (10 days) of “qualified sick leave” wages at the employee’s regular rate of pay, or, if higher, the applicable federal or state minimum wage, up to $511 per day and $5,110 in total. For self-employed taxpayers, the qualified sick leave equivalent amount is $511 or 100 percent of the “average daily self-employment income” of the individual for the taxable year.
Employees who are unable to work or telework because they must care for another person (including a minor child at home due to school closings), may receive up to two weeks (80 hours) of “qualified sick leave” wages at a rate of two-thirds their regular rate of pay, or, if higher, the applicable federal or state minimum wage, up to a maximum of $200 per day and $2,000 in total.
Employers must pay eligible employees “qualified family leave” wages for up to 10 weeks at a rate of two-thirds the employee’s regular rate of pay, not to exceed $200 per day, or a maximum of $10,000 for the calendar year.
Self-employed taxpayers must recognize that the calculation for determining qualifying wages and credits differs from those for employees.
How Do I Receive the Qualified Sick Leave and Qualified Paid Leave Credits?
Employers may receive the benefit of sick and family leave credits by reducing their federal employment tax deposits for that quarter by the amount of qualified leave wages they pay, plus allocable qualified health plan expenses and the employer’s share of Medicare tax on those wages. All reductions must be accounted for on the employer’s quarterly Form 941.
If an employer does not have enough federal employment taxes to cover the amount of the credits after deferred deposits of employer Social Security taxes, they may request an advance payment of the credits from the IRS by submitting IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she helps corporations, pass-through businesses, trusts and foreign entities maintain tax efficiency. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.