Several notable tax credits have been created for employers in response to COVID-19. The tax credits are designed to provide employers with immediate access to cash they would otherwise allocate to pay taxes. In follow-up to the credits for qualifying paid leave created by the Families First Coronavirus Act (“Families First Act”), the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides a tax credit for businesses who have been forced to suspend operations or have had a significant decline in gross receipts as a result of COVID-19.The CARE Act also allows employers to delay payment of employer payroll taxes. These credits may provide immediate relief to eligible employers and any employer impacted by COVID-19 should review the available credits to determine if they qualify.
Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)
Employee Retention Credit for Employers Subject to Closure due to COVID-19 (“Employee Retention Credit”)
Designed to encourage businesses to keep employees on their payroll, the Employee Retention Credit provides a refundable tax credit to eligible employers whose businesses have been negatively impacted by COVID-19. To provide guidance on the Employee Retention Credit, the IRS released IR-2020-62.
Eligibility: The Employee Retention Credit is available to all employers regardless of size, including tax-exempt organization, that 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’s gross receipts are below 50% of the comparable quarter in 2019.
- Once an employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify for the Employee Retention Credit after the end of that quarter.
Ineligible: Small businesses who receive a Small Business Interruption Loan under the CARES Act are not eligible to claim the Employee Retention Credit. State and local governments and their instrumentalities are also ineligible.
Credit: The amount of the credit is 50% of qualifying wages paid up to $10,000 for each employee for all calendar quarters, so the maximum credit for qualified wages paid to an employee is $5,000. The credit also includes a portion of the cost of employer provided healthcare.
- Example 1: Eligible employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the eligible employer for the qualified wages paid to Employee A is $5,000.
- Example 2: Eligible employer paid Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the eligible employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.
Qualifying Wages: Qualifying wages are dependent on the employer’s average number of employees in 2019:
- Employers with 100 or fewer employees on average in 2019: Qualified wages are the wages paid to any employee during any period of economic hardship due to: (1) a full or partial suspension of operations by order of governmental authority due to COVID-19; or (2) a significant decline in gross receipts. The credit is based on wages paid to all employees, regardless if they worked or not. If employees worked full time and were paid for full time work, the employer still receives the Employee Retention Credit.
- Employers with more than 100 employees on average in 2019: Qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Qualifying wages DO include the employer’s qualified health plan expenses that are properly allocable to the wages.
Qualifying wages DO NOT include wages paid to employees that the employer receives a credit for under the Families First Coronavirus Response Act.
Applicable Period: Wages paid after March 12, 2020, and before January 1, 2020, are eligible for the Employee Retention Credit.
Claiming Employee Retention Credit:
- Eligible employers may be immediately reimbursed for the Employee Retention Credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
- Beginning with the second quarter, eligible employers will report their total qualified wages and any related health insurance costs for each quarter on their quarterly employment tax returns (Form 941).
- If an employer’s employment tax deposits are not sufficient to cover the Employee Retention Credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
- Eligible employers may also request an advance of the Employee Retention Credit by submitting Form 7200.
Additional information about the Employee Retention Credit is available at: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act.
Delay of Payment of Employer Payroll Tax
The CARES Act allows all employers and self-employed individuals, to defer paying their portion of Social Security payroll tax (6.2%) otherwise due with respect to wages paid between March 27, 2020 and December 31, 2020. This allows employers to keep amounts they would otherwise be required to deposit with the U.S. Treasury on a semi-weekly or monthly basis. Employers who defer paying their portion of Social Security payroll tax will pay the deferred amounts to the U.S. Treasury in two installments. The first half of the deferred amount of payroll taxes from 2020 will be due on December 31, 2021, with the remaining half due December 31, 2020.
Similar to the Employee Retention Credit, employers who receive Small Business Act loans under the CARES Act are not eligible for this payroll tax deferral.
Families First Coronavirus Response Act (“Families First Act”)
Paid Leave
The Families First Act requires employers with fewer than 500 employees to provide additional paid leave for employees impacted by COVID-19. Eligible employees are entitled to an additional 14 days (80 hours) of Emergency Paid Sick Time (“EPST” or “Sick Leave”) and, under the expanded Emergency Family and Medical Leave Expansion Act, up to 12 weeks of job-protected leave to care for children whose school closed because of COVID-19 (“Family Leave”). Certain payment and eligibility requirements apply.
General Tax Credit Information
Summary: Employers with fewer than 500 employees are entitled to a dollar-for-dollar (100%) reimbursement through payroll tax offsets for all Sick Leave and Childcare Leave paid to eligible employees under the Act. The amount of credit cannot exceed the per diem and aggregate payment caps for Sick Leave and Childcare Leave wages under the Act. Self-employed individuals receive an equivalent credit which will be claimed on their income tax return and will reduce estimated tax payments.
Eligibility: Employer has fewer than 500 employees and is required under the Families First Act to pay Sick Leave and/or Family Leave.
Period: April 1, 2020 through December 31, 2020.
Claiming Credit: Eligible employers that pay qualified Sick Leave and Family Leave will report their total qualified leave wages, allocable qualified health plan expenses, and the employer’s share of Medicare tax on qualified leave wages, on their quarterly federal employment tax return, typically Form 941. Employers may use funds normally deposited with the IRS to pay qualifying Sick Leave and Family for the period from April 1 to December 31, 2020.
Refund: If the amount of qualifying Sick Leave and Family Leave an eligible employer pays is greater than the amount of taxes the employer owes, the excess credit is treated as an overpayment and refunded to the eligible employer.
Advancement: Eligible employers that do not have adequate funds to cover their obligations to provide qualified leave wages, allocable qualified health plan expenses and the employer’s share of Medicare tax on qualified leave wages, may request an advance of the credits by filing Form 7200. Eligible employers will account for any amounts received as advances on their Form 941 for the relevant quarter.
Document Retention: Employers that claim, or plan to claim, credits for Sick Leave or Family Leave, plus allocable qualified health plan expenses and the employer’s share of Medicare taxes, must retain sufficient records and documentation to support each employee’s leave to qualify for the credits. Employers should also retain Form 941, Employer’s Quarterly Federal Tax Return, and Form 7200, Advance of Employer Credits Due to COVID-19, and any other applicable filing made to the IRS requesting the credit.
Sick Leave Credit
Summary: Credit to fully reimburse employer for additional 14 days (80hrs) of emergency paid sick leave for employees who:
(1) are subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
(2) have been advised by a health care provider to self-quarantine related to COVID-19;
(3) are experiencing COVID-19 symptoms and is seeking a medical diagnosis;
(4) are caring of an individual subject to a government mandated quarantine or medical prescribed self-quarantine;
(5) are caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
(6) are experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury.
Amount of Credit:
- Employers of employees who take Sick Leave under the Families First Act to care for themselves, or because they have been directed to quarantine or self-isolate (circumstances (1), (2), or (3) above), are entitled to a credit equal to the employee’s normal pay or, if higher, the Federal minimum wage or any applicable State or local minimum wage, for up to two weeks (80 hours).
- Credit Cap: up to $511 per day and $5,110 in aggregate.
- Eligible employers of workers who use Sick Leave to care for others (circumstances (4), (5), or (6) above), are entitled to a credit equal to 2/3 the employee’s regular rate of pay, or, if higher, the Federal minimum wage or any applicable State or local minimum wage, for up to two weeks (80 hrs.).
- Credit Cap: up to $200 per day and $2,000 in the aggregate.
- The Sick Leave credit also includes the eligible employer’s share of Medicare tax imposed on the qualifying wages and its allocable cost of maintaining health insurance coverage for the employee during the Sick Leave Period. The eligible employer is not subject to the employer portion of social security tax imposed on those wages.
Family Leave
Summary: Credit to fully reimburse employers for amounts paid to employees who take Family Leave. Employees are entitled to up to 12 weeks of job-protected paid leave to care for children whose schools or childcare have closed because of COVID-19. The first 10 days of Family Leave are unpaid; however employee can use Sick Leave, vacation days, or other employer offered paid leave options to cover the first 10 unpaid days. For the remaining 10 weeks employees are paid at 2/3 their normal rate of pay.
Amount of Credit:
- Equal to the amount paid to the employee during the paid leave, equal to 2/3 of the employee’s regular pay for up to 10 weeks. Eligible employers are entitled to an additional tax credit based on the costs to maintain health insurance coverage for the eligible employee during the leave.
- Credit Cap: Up to $200 per day and $10,000 in aggregate.
- Family Leave credit includes eligible employer’s share of Medicare tax imposed on those wages paid to employee taking Family Leave and employers cost of maintaining health insurance coverage for the employee during the Family Leave period. The eligible employer is not subject to the employer portion of social security tax imposed on those wages.
Example from IRS
An eligible employer pays $10,000 in Sick Leave wages and Family Leave wages in Q2 2020. The employer does not owe the employer’s share of social security tax on the $10,000, but it will owe $145 for the employer’s share of Medicare tax. The employer’s credits equal $10,145, which includes the $10,000 in qualified wages plus $145 for the employer’s share of Medicare tax (this example does not include any qualified health plan expenses allocable to the qualified leave wages). This amount may be applied against any federal employment taxes the employer is liable for on wages paid in Q2 2020. Excess credits above the federal employment tax liabilities are refunded in accordance with normal procedures. Employers must still withhold their employees’ share of social security and Medicare taxes on the qualified Sick Leave and Family Leave wages paid.
Notes On Interplay Between CARES Act and Families First Act
- An employer meeting all of the requirements for qualified leave wages credit under the Families First Act and employee retention credit under the CARES Act may receive both credits, but not for the same wage payments.
- An eligible employer may receive tax credits for qualified leave wages and a Small Business Interruption Loan under the CARES Act. However, if an eligible employer receives tax credits for qualified leave wages, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under section 1106 of the CARES Act.
The IRS has provided answers to many questions related to employer tax credits here.
Concluding Remarks
Should you have any questions regarding employer tax credits or other options for your business, please do not hesitate to contact us.
Alexis Clinebell
[email protected]