What Are the New Employer Tax Credits?

by John Cooney on Jun 15, 2020

Taxes

There is no question about the devastating impact the coronavirus has had on individuals and businesses.  On the business side, there is some relief out there for employers who qualify.  In this article, we will discuss two new credits, the Employee Retention Credit and the Leave Credits.  We will discuss what they are, who qualifies, how to claim the credits, and what amounts are available to take as a credit.

The Employee Retention Credit

What Is It?

The Employee Retention Credit was created to help employers keep employees on their payroll.  Employers can claim a refundable tax credit of 50% of up to $10,000 in qualified wages paid to an employee by an eligible employer experiencing economic hardship related to Covid 19.  The period covered for the credit is March 13th, 2020 through December 31st, 2020.

Who Can Claim the Credit?

Generally, all employers are eligible, regardless of size of the company.  However, there are two exceptions, these employers cannot claim the credit:

  • Federal, state and local governments and their agencies are not eligible.
  • Businesses that received a Small Business Interruption Loan under the Paycheck Protection Program are not eligible.

Eligible employers must fall into one of two categories:

  • The employer’s business is fully or partially suspended by government order due to Covid-19 during the calendar quarter.
  • The employer has a significant decline in gross receipts.  This begins with the first quarter in 2020 and is at least a 50% reduction in gross receipts from the same quarter in the previous year.

What Counts As A Qualified Wage?

Wages paid to an employee count, as do health plan expenses, but the amount you can count varies based on the number of employees the business has.

100 or fewer employees:

  • If a business averaged 100 or fewer full-time employees in 2019, the credit is based on qualified wages paid to all employees, whether they worked or not. 

100 or more employees:

  • If a business averaged more than 100 employees in 2019, then the credit is only allowed for qualified wages paid to employees for time they are not providing services during the calendar quarter.

It is important to note that wages can not be counted twice.  If you factored in an employee’s wages to claim the paid sick and family leave credit, you can not then use those same wages to claim the Retention Credit.  Additionally, an employee is not counted towards this credit  if the employer is allowed a Work Opportunity Tax Credit for this employee under section 51 of the Internal Revenue Code.

How Do You Claim The Retention Benefit?

  • To claim the credit, employers will report their total qualified wages and related health insurance costs for each quarter on Form 941, their quarterly employment tax return.  The credit is then taken against the employer’s share of social security tax. 

Leave Credits

Leave Credits are available for eligible employers who pay qualified sick leave or qualified family leave wages from April 1st, 2020 through December 31st, 2020.  For an employer to be eligible, they must have fewer than 500 employees.  There are two types of Leave Credits, Paid Sick Leave Credit and Family Leave Credit.

Paid Sick Leave Credit

The Paid Sick Leave Credit applies in two different scenarios:

Scenario 1:  Employee is

  • Subject to a Covid-19 quarantine or isolation order.
  • Advised to self-quarantine because of Covid-19.
  • Has Covid-19 symptoms and are seeking a medical diagnosis.

For cases involving an employee who meets one of the criteria in scenario 1, the employer’s credit options are:

  • Receive a credit at the employee’s regular rate of pay, up to $511/per day and $5,110 total.
  • The employer is also eligible for credits for qualified health care plan expenses for the employee and the employer’s portion of Medicare tax expenses.

Scenario 2:  Employee is:

  • Caring for someone who is subject to a Covid-19 quarantine or isolation order, or for someone who is advised to self-quarantine because of Covid-19.
  • Caring for a child whose school or place of care is closed due to Covid-19.
  • Caring for a child whose child-care provider is unavailable due to Covid-19.

For cases involving an employee who meets one of the criteria in scenario 2, the employer’s credit options are:

  • Receive a credit for two-thirds of the employee’s regular rate of pay, up to $200/day and $2,000 total, for up to 80 hours
  • The employer is also eligible for credits for qualified health plan expenses for the employees and the employer’s portion of Medicare tax.

Family Leave Credit

The Family Leave Credit applies to employees who:

  • Are caring for a child whose school or place of care is closed due to Covid-19.
  • Caring for a child whose child care provider is unavailable due to Covid-19.

The Family Leave Credit is:

  • Equal to two-thirds of an employee’s regular rate of pay up to $200/day or $10,000 total.
  • Up to 10 weeks of qualified leave can be applied toward the Family Leave Credit, which can be combined with the Sick Leave Credit for a total of 12 weeks and $12,000.
  • The employer is also eligible for credits for qualified health plan expenses for the employees and the employer’s portion of Medicare tax.

How Do You Claim The Leave Credits?

Employers can claim the credit immediately by reducing their required deposits of payroll taxes that have been withheld from their employees’ wages by the amount of the credit.  Employer’s can due this by reporting all wages and related health care expenses when they file Form 941, Employer’s Quarterly Federal Tax Return and then applying the credit amount.  If the employer’s tax deposits are less than the credit amount, they can receive an advance payment from the IRS by Filing Form 7200.

 

These are uncertain times for us all, even now, as businesses and states open back-up, we are not sure what the future holds.  Our government has made an effort to assist those businesses who have been affected or who have employees affected by the pandemic.  Know what those efforts are and make sure you are taking advantage in a way that keeps within the regulations and receiving the credits you qualify for.  

 

What are Your Tax Related Questions?

Contact Us Now