During the pandemic, many businesses struggled to retain employees due to a temporary slow-down in business and the government-mandated closures. The government has provided three rounds of stimulus aimed at helping individuals and businesses get through the pandemic, including pandemic tax credits for employers that have been able to retain their employees. The Employee Retention Credit and Employer Paid Leave Credit have provided small to midsize business owners with tax credits in an effort to retain employees and provide them with the necessary aid to allow for paid COVID-related sick leave.
Congress has improved the programs and credits with each round of stimulus, working out the kinks and providing further clarification to business owners. As we emerge from the shutdowns and get back to business as usual, there are still two credits available that can benefit many businesses this year—the Employee Retention Credit and the Employer Paid Leave Credit. Read on to determine whether your business is eligible to claim either or both.
Employee Retention Credit
The Employee Retention Credit (ERC) was introduced as a part of the CARES Act in 2020 to provide a refundable tax credit against certain employment taxes in an effort to retain employees throughout the COVID-19 pandemic. Initially congress forced businesses to choose between the ERC or the fully forgivable Paycheck Protection Program (PPP). Further legislation changed that, allowing business owners to use both pandemic tax credits for employers while increasing the credit amount and program period through December 31, 2021. Eligible employers get access to the credit immediately by reducing their quarterly employee taxes.
Who is eligible for the Employee Retention Credit?
As of January 1, 2021, businesses are eligible if they were in operation from January 1, 2021, through June 30, 2021, and experienced one of the following:
- A full or partial closure of business due to government orders limiting commerce, travel, or group meetings due to COVID-19.
- A 20% decline in gross receipts in a calendar quarter in 2021 compared to the same calendar quarter in 2019.
Businesses that weren’t operating in 2019 can use a calendar quarter in 2020 compared to 2021.
Qualified wages updated
Effective January 1, 2021, the definition of qualified wages changed:
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
Claiming the ERC and PPP
Retroactively to the March 27, 2020, enactment of the CARES Act, employers who received PPP loans can claim the ERC for qualified wages not accounted for in obtaining forgiveness of the PPP loan. Eligible employers should report their total qualified wages and related health insurance costs quarterly on Form 941.
Calculating the ERC amount while taking a PPP loan can be tricky; an experienced CPA can assist with identifying the appropriate wages that will make the business eligible for both pandemic tax credits for employers and PPP forgiveness. We have helped many small businesses navigate the PPP and other pandemic relief programs; contact us to schedule a consultation.
Employer Paid Leave Credit
Emergency paid sick and family medical leave were introduced in 2020 as a part of the Families First Coronavirus Response Act (FFCRA). Small to midsize employers (500 employees or less), certain government employers, and self-employed individuals are able to claim refundable tax credits that reimburse them for costs related to providing paid sick leave to employees due to COVID-19 and time to receive and recover from COVID-19 vaccines.
Who is eligible for the Employer Paid Leave Credit?
The tax credits for paid sick leave are for eligible employers who provided sick leave related to COVID-19, for up to two weeks (80 hours) per employee, limited to $511 per day. The credit for paid family leave is up to twelve weeks, and limited to $200 per day at 2/3rds of the employee’s pay rate.
What has been updated?
The American Rescue Plan Act of 2021 extended and amended the emergency paid sick and family leave for wages from April 1, 2021, through September 30, 2021. The amendment also extends the definition to include paid time off for employees who are:
- Waiting for COVID-19 test results
- Under a mandated quarantine
- Caring for an individual who has COVID-19 or an adverse reaction to the vaccine
- Receiving the vaccination, and any time needed to recover from adverse reactions to receiving the vaccine
- Caring for a child whose school or daycare has been closed due to COVID-19 precautions
The leave established in the Families First Coronavirus Response Act (FFCRA) reset on April 1, 2021, meaning that if an employee had previously used 10 days/80 hours of COVID-related paid sick leave, they can now use an additional 10 days/80 hours of FFCRA paid sick leave as of April 1, 2021. Further, the American Rescue Plan adjusted the Emergency Family and Medical Leave Expansion Act (EFMLA) to provide the employee with pay for the duration of the leave period (previously the first two weeks were unpaid). That change effectively increased the maximum tax credit from $10,000 to $12,000 per employee.
Claiming the credit
Employers claiming the paid leave credit should do so on a quarterly basis on their federal employment tax return, typically using Form 941, Employer’s Quarterly Federal Tax Return. Self-employed individuals may claim the credit using Form 1040, U.S. Individual Income Tax Return.
In anticipation of claiming the employer paid leave credit and ERC, employers can keep the federal employment taxes that would have been paid, including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes, and the eligible employer’s share of social security and Medicare taxes. Form 941’s instructions explain how to reflect the reduced liabilities each quarter. If you are unsure of how to correctly account for the reduction in liability, your CPA can assist you in preparing your Form 941.
If an employer doesn’t have enough cash on hand to cover emergency paid wages, they may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
If you have taken advantage of one of the pandemic tax credits for employers or other COVID related programs and need assistance with Form 941 or Form 7200, contact us to schedule a consultation. If you have yet to utilize the programs, it’s not too late!