With the year ending and tax season on the horizon, it can be helpful to get clarity on various tax credits. With COVID impacting the economy and quite possibly your business, you should ensure you can save every dollar you can.
Congress enacted three tax credits that can provide some relief to eligible employers at this difficult time. These credits were initiated by three separate pieces of federal legislation, and it’s easy to confuse them. Here is a quick overview of them that should help provide some clarity (and hopefully save you money come tax time).
1. Family and Medical Leave Credit
Created by the Tax Cuts and Jobs Act (TCJA) in 2017, this credit was scheduled to be effective for the 2018 and 2019 tax years. However, once the COVID-19 pandemic hit, the Taxpayer Certainty and Disaster Relief Act extended it through the 2020 tax year.
The Family and Medical Leave Credit is a general business credit based on wages paid to qualified employees who are on family and medical leave, subject to certain conditions. Employers must have a written policy in place that meets certain requirements. For example, your policy must provide for 1) at least two weeks of paid family and medical leave to be paid to all qualified employees who work full time (prorated for employees who work part time), and 2) paid leave that can’t be less than 50% of the wages normally paid to the employee.
The credit percentage ranges from 12.5% to 25% of wages, depending on the employee’s wage. This credit is available only for wages paid to employees who have worked for you for at least one year and haven’t received more than $72,000 in compensation the previous year.
2. Employee Retention Credit (ERC)
The ERC is part of the Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March. It equals 50% of the first $10,000 of qualified wages an employer pays to employees after March 12, 2020, and before January 1, 2021. This refundable credit offsets the 6.2% Social Security tax portion of payroll tax.
Your organization is eligible for the ERC if it fully or partially has suspended operations during any calendar quarter due to government orders relating to COVID-19. It also is applied if you experience a significant decline in business, which is defined as gross receipts equal less than 50% of the gross receipts for the same calendar quarter in 2019. If you’re eligible, you can immediately benefit by reducing payroll tax deposits that are currently required. Also, if payroll tax deposits aren’t sufficient to cover the credit, you may obtain an advance payment from the IRS.
“Qualified wages” depend on your number of employees in 2019. For organizations with more than 100 employees, qualified wages are defined as the wages, including certain health care costs, (up to $10,000 per employee) paid to employees that aren’t providing services because operations were suspended or due to the decline in gross receipts. The same definition applies to organizations with 100 or fewer employees, however it applies regardless of whether employees are providing services.
3. COVID-19 Credit
The Families First Coronavirus Response Act provides employers with a tax credit covering certain costs of required paid sick leaves and expanded family and medical leaves related to COVID-19. This credit is available for wages paid from April 1, 2020, through December 31, 2020.
To qualify, employers with fewer than 500 employees must provide emergency paid sick leave of as much as to $511 per day for as long as 10 days, up to a total of $5,110. Eligible employees must be in COVID-19 quarantine, caring for an individual in quarantine or waiting to receive a COVID-19 diagnosis. Employees also may receive emergency paid sick leave of up to $200 per day for a maximum of 10 days, for a total of $2,000. The COVID-19-related credit offsets the 6.2% Social Security tax component of payroll tax. Any excess is refundable.
Note that employers can’t aren’t allowed to claim this credit if they’re already receiving the TCJA family and medical leave credit for the same amounts.
Because they have many qualifications and rules, tax credits can often be confusing. And with all the new legislation and rules around COVID, they can be even more difficult. If you need help navigating these tax credits, contact us at Filler and Associates.