COVID-19 Payroll Tax Credits

The impact of the COVID-19 emergency on all businesses has been transformative. The combination of shelter in place orders with forced business closures have left many facing dwindling demand for products and services. The seemingly overnight shift has forced many to make tough decisions about whether to furlough or terminate employees and how to manage expenses. The depth of the challenge becomes clear in light of the reported 4.6 million Californians who have filed for unemployment. To help cope with the emergency, Congress passed both the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act. The FFCRA provides expanded sick leave benefits and the CARES Act provides various tax and financial relief options. While they attack the emergency from different angles and for different purposes, they are connected through their use of payroll tax credits.

Paid Leave Tax Credits

The FFCRA requires employers, including tax-exempt entities, with less than 500 employees to provide eligible employees with paid sick time or paid family leave. For paid sick leave, employers are required to provide 10 days at regular wages (a maximum of $511/day) if the employee is quarantined or is experiencing COVID-19 symptoms and is seeking a diagnosis. Employees can receive 2/3 normal wages (up to $200 day) if they need to care for a household member who has been quarantined by a government order or self-quarantined or a child whose school or place of care is closed.

For paid family leave, employers are required to provide 10 weeks of paid time at 2/3 regular wages (a maximum of $200/day) to care for a child whose school or place of care is closed due to COVID-19.

To help businesses manage the potential additional expenses, Congress included a refundable tax credit to offset these expenses. Note that qualifying employers can claim credits for any paid sick or family leave time taken between April 1, 2020, and December 31, 2020.

Self-employed taxpayers are also eligible for this benefit if they otherwise met the requirements.

Importantly, the Department of Labor has clarified that to be eligible, the employer must have work available for the employee to perform at the normal job site or via telework. Employers not in operation or not having available work would not qualify to provide this benefit to employees.

Employers with fewer than 50 employees may qualify for an exemption from the requirement to provide leave due to school closings or unavailability of childcare.

What’s Included?

The credits cover 100% of up to ten days of qualified sick leave and ten weeks of paid family leave wages along with any qualified health plan expenses plus the amount of the employer’s share of Medicare taxes.  The IRS defines qualified health plan expenses as amounts paid by an employer to provide and maintain a group health plan related to an employee’s qualified leave wages.

Claiming the Credit

The credit is claimed by reporting total qualified leave wages (including health plan expenses and employer’s share of Medicare tax) for each quarter on IRS Form 941. During the quarter, the employer can retain, rather than deposit, federal employment taxes including federal income tax withheld from employees and the employee and employer’s share of social security and Medicare taxes. It’s important to note, in any calendar quarter where the amount of the credit exceeds tax liability, the excess will be treated as an overpayment and refunded.

If the credit will exceed the employer’s federal employment tax deposits, rather than waiting for a refund as discussed above, the employer may file Form 7200 to request an advance refund of the credit.

Employer Retention Tax Credit

The CARES Act created the Employee Retention Tax Credit (ERTC), a refundable tax credit against certain employer-side employment taxes. The amount of the credit is equal to 50% of the qualified wages an employer pays to employees between March 12, 2020, and January 1, 2021. The credit was designed to help businesses increase cash flow by providing a refundable credit to help pay for employee compensation. As discussed above, employers can file Form 7200 to claim an advanced credit.

Who is Eligible?

Businesses and tax-exempt organizations that were in business at the start of the year are eligible to claim the credit. It is important to note that those who receive or will receive a loan from the Paycheck Protection Program are ineligible to participate regardless if their loan will be forgiven or not. A business must meet one of the requirements outlined below.

  • The company must have experienced a partial or full business suspension due to government orders limiting operations, travel, and other restrictions, or
  • They must have experienced a significant decline in gross receipts during the calendar quarter, also known as, the Gross Receipts Decline (GRD) test.

What is a Significant Decline in Gross Receipts?

A significant decline begins with the first calendar quarter in 2020 in which gross receipts are 50% less when compared to the same period in 2019. It is considered to have ended in the 2020 calendar quarter when gross receipts are greater than 80% when compared to the same time period in 2019, or in the first quarter of 2021. 

What are Qualified Wages?

These wages are determined by the total number of employees retained by the company. When a business has averaged more than 100 full-time employees during 2019, qualified wages include compensation and related health insurance premiums (up to $10,000 per employee), paid to employees not working because operations were reduced or suspended or during the period of a decline in gross receipts. In this situation, businesses can only count wages up to the amount an employee would have been paid during the 30 days prior to the hardship.

When a business averaged less than 100 full-time employees in 2019, qualified wages include compensation and health insurance costs (up to $10,000 per employee) paid to any employee during the time when operations were reduced or suspended or the period of decline in gross receipts, regardless of whether employees are providing services. As a result these employers can claim the credit for qualified wages paid to both employees currently working and those not working.

Contact Us

The COVID-19 emergency has created new and unexpected challenges for all of us. The opportunities afforded by these two payroll tax credits are not ones that should be missed. Since the analysis and calculation process can be complex, it’s important to seek knowledgeable counsel that can assist you.  If you have questions or need assistance with a COVID-19 tax or SBA loan issue, Abbott, Stringham and Lynch can help. For additional information, call us at 408-377-8700 or click here to contact us.

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