Which COVID-19-Related Payroll Tax Credits Is My Business Eligible to Receive? by Cherry Laufenberg, CPA
In the wake of the COVID-19 pandemic, the U.S. enacted laws providing a variety of financial-relief measures to support businesses struggling to maintain operations and payroll through the crisis period. Key among those provisions are tax credits for businesses that retain employees despite full or partial suspensions of their operations and that continue to pay workers who qualify for sick and family leave.
It is critical that businesses pay careful attention to ongoing IRS guidance to understand how and if they may qualify for these tax benefits. For example, employers may qualify for both the employee retention tax credit and the paid sick and family leave credits, but not for the same wages.
Employee Retention Credit
Private-sector businesses, including nonprofits, that have been able to keep their workers on payroll through the COVID-19 crisis may be eligible for refundable tax credits of as much as $5,000 per employee for the year.
Who Qualifies for the Employee Retention Credit?
Businesses qualifying for the employee retention tax credit must continue to pay workers between March 12 and Dec. 31, 2020, despite 1) a full or partial suspension of operations for any quarter of 2020 due to government order, or 2) a significant decline in gross revenue during a calendar quarter as compared to the same calendar quarter in 2019.
For purposes of determining whether a decline in gross receipts is “significant,” a business will need to identify the first calendar quarter in 2020 (if any) in which its gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. Employer’s will no longer qualify for the credit when 2020 gross receipts exceed 80 percent of a comparable quarter in 2019 or with the first calendar quarter of 2021.
It is important to note that any business voluntarily suspending its operations or reducing staff hours may still qualify for the Employee Retention Credit, provided it meets the significant decline in gross receipts test threshold. This includes businesses that were deemed “essential” and allowed to continue operations during government-mandated closures.
Who Does Not Qualify for the Credit?
Specifically excluded from the employee retention tax credit are government entities, self-employed taxpayers and businesses and nonprofits that receive Paycheck Protection Program (PPP) loans under the CARES Act.
How Do I Calculate the Employee Retention Credit?
The actual amount of the employee retention tax credit available to a particular business is equal to 50 percent of the “qualifying wages” (including employer-provided health care costs) it pays to workers between March 12 and Dec. 31, 2020, up to a maximum of $10,000 per employee, for all calendar quarters. Again, the available credit is capped at $5,000 per employee per year.
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 12 through December 31, 2020, regardless of whether those employees actually provided services on those dates.
For large businesses with more than 100 employees, the amount of the credit is limited to wages paid to employees during a period in which those employees do not provide services to the employer.
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 Families First Coronavirus Response Act (FFCRA) introduced refundable tax credits to reimburse businesses and nonprofits for qualified wages and health care expenses they pay to employees who are entitled to paid sick leave or expanded family and medical leave due to COVID-19 during the period of April 1 through December 31, 2020. Qualifying employers are also eligible to receive credits for their portion of Medicare tax on wages.
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 employer must pay eligible workers for “qualified sick leave” vary depending on such factors as the reason the employee is 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 their 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.