Coronavirus Tax Credits | FFCRA & CARES Act Payroll Credits

Coronavirus Payroll Tax Credits for Employers

The American Rescue Plan, signed into law March 11, 2021, extends paid leave tax credits to employers who voluntarily choose to provide COVID-19 paid sick and family leave. FFCRA paid leave benefits are no longer mandatory. But, employers who voluntarily continue providing the paid leave to employees can claim the FFCRA tax credit until September 30, 2021. 

The latest COVID relief plan also extends the Employee Retention Credit to December 31, 2021, and expands eligibility for the credit. 

One of the coronavirus small business relief measures comes in the form of employer tax credits. There are two groups of refundable coronavirus tax credits available for employers: 1) COVID-19-related tax credits for paid leave and 2) Employee Retention Credit.

Read on to learn more about both payroll tax credits and whether you are eligible.

Coronavirus tax credits for employers 

The employer tax credits help offset employer hardships relating to payroll. 

The Families First Coronavirus Response Act (FFCRA) established the COVID-19 tax credits. These credits help small and medium employers afford the coronavirus-related paid sick and family leave required by the FFCRA.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Employee Retention Credit. This credit encourages employers to keep employees on their payroll during coronavirus-related hardships.

1. COVID-19 paid leave tax credits (FFCRA)

Under the FFCRA, employers with fewer than 500 employees are required to provide qualifying employees with paid sick time or paid family leave. 

Here’s a brief summary of the FFCRA-mandated paid leave:

  • Paid sick leave: 10 days of paid time at the employee’s regular wages (maximum $511/day) if they have coronavirus or two-thirds their wages (maximum $200/day) if they need to care for someone else who has coronavirus
  • Paid family leave: 10 weeks of paid time at two-thirds an employee’s regular wages (maximum $200/day) if a child’s school or place of care is closed due to coronavirus

The COVID-19 tax credits give businesses the funds to provide these required benefits. There is a paid sick leave refundable credit and a paid family leave refundable credit. Both FFCRA leave credits reimburse employers, dollar-for-dollar, for the cost of providing paid leave (up to the maximum amounts). Self-employed individuals can also qualify for receiving these tax credits. 

COVID-19 tax credits are increased by the:

  1. Qualified health plan expenses allocable (i.e., the cost of maintaining coverage for the employee on leave) to the leave wages
  2. Employer’s share of Medicare tax on the leave wages

This means your total tax credit claim can include the:

  1. Paid leave you give the employee
  2. Employer Medicare tax on the leave wages
  3. Health plan expenses associated with the leave wages 

Keep in mind that paid leave wages are not subject to the employer portion of Social Security tax. Because you don’t pay employer SS tax on these wages, do not count it as part of the tax credit. 

You can claim the tax credits for any paid leave wages doled out between April 1, 2020 – December 31, 2020.

Patriot Software payroll customers: Read our help article, “How To Claim Payroll Tax Credit For COVID-19 Paid Leave,” to learn how you can claim the credit in our software.

Who can claim the COVID-19 paid leave credits?

If the FFCRA requires you to provide paid sick and family leave to employees, you are eligible for the tax credits. 

You can claim the paid leave credits if you:

  1. Have fewer than 500 employees
  2. Are required to provide paid sick and family leave under the FFCRA 
  3. Provide paid sick or family leave wages to an employee or employees

How do the paid leave tax credits work?

You might be wondering how exactly these tax credits work. According to the IRS:

The credit is allowed against the taxes imposed on employers by section 3111(a) of the Internal Revenue Code and section 3221(a) of the Code on all wages and compensation paid to all employees.”

What this means to you is that you can hang onto federal employment taxes on wages between April 1 – December 31 that you normally would have deposited with the IRS. This includes both withheld employee taxes and your employer taxes. The IRS allows employers to fund the paid leave like this “in anticipation of receiving the credits.” 

The taxes you can retain instead of depositing with the IRS include:

  • Federal income tax
  • Employee share of Social Security tax
  • Employee share of Medicare tax (plus additional Medicare tax, if applicable)
  • Employer share of Social Security tax
  • Employer share of Medicare tax

Again, you do not pay Social Security tax on the paid leave wages—the above list refers to taxes on regular wages throughout the period of time.  

If you provide paid leave to employees and have more in credits than the taxes you owe, you are entitled to a refund. 

How do I claim these credits? 

You can claim the COVID-19 paid leave tax credits on your federal employment tax returns. For most employers, this means Form 941, Employer’s Quarterly Federal Tax Return. 

You might also claim the credit on Form 944, Employer’s ANNUAL Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. 

On the employment tax return, you will report the total qualifying leave wages, health plan expenses associated with those wages, and employer share of Medicare tax on the leave wages. 

The IRS will release Form 941 instructions on how to show your reduced tax liabilities for the quarter on the document. 

What if my federal employment taxes don’t cover the leave wages?

If your federal employment taxes don’t cover the leave wages, you can fill out Form 7200, Advance Payment of Employer Credits Due to COVID-19. 

This form lets you request an advance payment from the IRS. You can use this IRS payment to cover your costs. Then, when you file Form 941 for the quarter you received the advance, account for the advance amounts. 

Self-employed individuals cannot request an advance payment of the paid leave credits. 

File the form at any time before the end of the month following the quarter in which you paid the qualified wages. And, you can file Form 7200 several times during each quarter, according to the IRS

On Form 7200, enter information such as:

  • Basic business information (EIN, name, address, etc.)
  • The type of employment tax return form you use (e.g., Form 941)
  • Total qualified sick and/or family leave wages eligible for the credit in the quarter
  • Any Employee Retention Credit you’re eligible for
  • Total advance requested 

Fax Form 7200 to: 855-248-0552.

What kind of recordkeeping do I need to do?

To claim the credit, you must have the documents to back it up. If you file Form 7200, keep a copy of the form in your records, too. Keep all documents in your records for at least four years. 

Keep documents showing how you determined the:

  • Amount of qualified sick and family leave wages
  • Qualified health plan expenses allocated to the paid leave wages
  • Employees were qualified to receive the wages (e.g., a doctor’s note)

2. Employee Retention Credit (CARES Act)

Under the CARES Act, eligible employers able to keep employees on their payroll can claim the Employee Retention Credit. 

The Employee Retention Credit is a refundable tax credit equal to 50% of qualifying wages employers pay to their employees after March 12, 2020 and before January 1, 2021.  

The maximum credit amount is $5,000 per employee for all calendar quarters. This means the IRS will only take wages up to $10,000 per employee into account. 

Who can claim the Employee Retention Credit?

Employers eligible for the Employee Retention Credit are those who, in any calendar quarter in 2020, have either:

You cannot use the Employee Retention Credit if you’ve taken out a Paycheck Protection Program (PPP) loan. 

Self-employed individuals are not eligible for the Employee Retention Credit for their self-employment services or earnings. Governmental employers are not eligible, either. 

How does the tax credit work?

So, how does the Employee Retention Credit work? According to the IRS:

The credit is allowed against the employer portion of Social Security taxes under section 3111(a) of the Internal Revenue Code, and the portion of taxes imposed on railroad employers under section 3221(a) of the RRTA that corresponds to the Social Security taxes under section 3111(a) of the Code.” 

The Employee Retention Credit lets employers take a credit in the amount of 50% of up to $10,000 of an employee’s qualifying wages ($5,000 is the maximum credit amount). This credit then reduces your employer Social Security tax liability. If your credit is more than your SS tax liability, you will receive a refund. 

So, what are qualifying wages? Qualifying wages are the wages and compensations employers pay to employees, as well as qualified health plan expenses associated with those wages during the time period. 

The number of full-time equivalent (FTE) employees you had in 2019 determine qualifying wages, too:

  • Employers who averaged fewer than 100 FTEs: The tax credit is based on wages you paid to all employees (during the period of suspended operations or gross receipts decline)
  • Employers who averaged more than 100 FTEs: The tax credit is based on wages paid to employees who did not work (during the period of suspended operations or gross receipts decline)

FFCRA paid leave wages are not qualifying wages you can claim the Employee Retention Credit on. 

If you have more in credits than certain federal employment taxes you owe, you are entitled to a refund. 

How do I claim this credit? 

Claim the Employee Retention Credit on your federal employment tax return (e.g., Form 941, 944, 943, etc.). Report the total qualifying leave wages. 

The IRS will release Form 941 instructions on how to show your reduced tax liabilities for the quarter on the document. 

What if my federal employment taxes don’t cover the payments?

If your federal employment taxes don’t cover the leave wages, fill out Form 7200 to request an advance of the credits. 

File the form at any time before the end of the month following the quarter in which you paid the qualified wages. Again, you can file Form 7200 several times during each quarter. 

On Form 7200, enter information such as:

  • Basic business information (EIN, name, address, etc.)
  • The type of employment tax return form you use
  • Total Employee Retention Credit for the quarter 
  • Any qualified sick and family leave wages you’re eligible for
  • Total advance requested 

When filing Form 941 for the quarter you received the advance, remember to account for the advance amounts. 

Fax Form 7200 to: 855-248-0552.

What kind of recordkeeping do I need to do?

To claim the Employee Retention Credit, keep the following for at least four years:

  • Documents showing how you figured the amount of the Employee Retention Credit
  • Documents showing you were eligible for the Employee Retention Credit based on suspended operations or gross receipts decrease 

If you filed Form 7200, keep a copy in your records, too. 

Alert! Changes to the ERC

The American Rescue Plan extends the Employee Retention Credit to December 31, 2021. It also expands eligibility for the credit to:

  • New startups that were established after February 15, 2020 with annual gross receipts of up to $1 million
    • Credit capped at $50,000 per calendar quarter for startups
  • Businesses that experienced a revenue decline of 90% or more (compared to the same calendar quarter of the previous year)

The Consolidated Appropriations Act (the Act or CAA) was signed into law on December 27, 2020. The new legislation expands the Employee Retention Credit. 

The Act made the following changes to the ERC:

  • Increases the refundable payroll tax credit from a maximum of $5,000 to a maximum of $14,000 by changing the calculation from 50% of wages paid up to $10,000 to 70% of wages paid up to $10,000 per quarter
  • Expands eligibility by reducing the required year-over-year gross receipts decline from 50% to 20%
  • Provides a safe harbor allowing employers to use previous quarter gross receipts to determine eligibility
  • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 each quarter
  • Removes the 30-day wage limitation
  • Allows businesses with 500 or fewer employees to advance the credit anytime during the quarter based on wages paid in the same quarter in a previous year
  • Allows new employers (including employers that did not exist for all or part of 2019) to be eligible for the credit

Another major change is that businesses can now take the Employee Retention Tax Credit and participate in the PPP. Before, businesses were only allowed one or the other.

Besides tax credits, what other help is there?

In addition to coronavirus-related tax credits, there is also small business relief in the form of coronavirus loans

Coronavirus loan options include the Paycheck Protection Program (PPP) loans, Economic Injury Disaster Loan, and SBA Express Bridge Loan.  

What employer relief combinations can you take?

You can claim the paid leave tax credits and receive a PPP loan. However, the paid leave wages do not count toward your eligible “payroll costs” under the PPP’s loan forgiveness.

Thanks to the Consolidated Appropriations Act, businesses are now able to take the Employee Retention Credit in addition to participating in the PPP.  

You can also claim both the Employee Retention Credit and the paid leave credits. But, you cannot claim both credits on the same wages. 

This is not intended as legal advice; for more information, please click here.

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