Employer Tax Credits
As businesses reel from the impact of COVID 19, both employers and employees face a crunch. The federal government, therefore, has provided some additional employer tax credits to ensure that employers are encouraged to keep employees on payroll via these credits. To this end, two different credits have been announced viz. the employee retention credit and the leave credits (paid sick leave and paid family leave).
Employee Retention Credit
- The employee retention credit is a refundable credit designed to encourage employers to keep employees on the payroll.
- The credit originally applied to wages paid from 03/13/2020 to 12/31/2020. It has now been extended and expanded and can be claimed through Dec 31, 2021
- The credit is 50% of up to $10,000 in wages paid to an employee by an eligible employer experiencing economic hardship caused by/related to COVID 19 under the CARES Act 2020. Under the Consolidated Appropriations Act, Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualify for the credit is now $10,000 per employee per quarter for the first two quarters of 2021. Under the American Rescue Plan 2021, the credit remains at 70% of qualified wages up to a $10,000 limit per quarter so a maximum of $7,000 per employee per quarter for all of 2021. So, an employee could claim $7,000 per quarter per employee or up to $28,000 for 2021. However, under this law, certain start-up businesses — those started after Feb. 15, 2020, that was forced to shut down due to government order — may be allowed a credit of up to $50,000 per quarter.
- The credit is available to most employers irrespective of size including tax-exempt organizations. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.
- Those are considered essential unless they have a supply of critical material/goods disrupted in a manner that affects their ability to continue to operate.
- Businesses shuttered but were able to continue their operations largely intact through telework. However, any of these businesses still may qualify for the credit with the second-factor test.
- An employer that has a significant decline in gross receipts. – Beginning in 2021, businesses must be impacted by forced closures or quarantines or have seen more than a 20% drop in gross receipts in the quarter compared to the same quarter in 2019. Businesses also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- Under CARES Act Qualified wages include related qualified health plan expenses. If a business had 100 or fewer full-time employees, the credit is based on wages paid to all employees. If a business had more than 100 employees, the credit is allowed only for the time that the employees did not provide service but were paid. The American Rescue Plan 2021 allows certain hardest-hit businesses to claim the credit against all employee’s qualified wages instead of just those who are not providing services. These hardest-hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020.
- Employers may not use the same wages to claim retention credit as well as leave credit.
Leave Credits
The leave credits are available to eligible employers for paid sick leave as well as paid family leave. Eligible employers are those with less than 500 employees who paid qualified sick leave/family wages between 04/01/2020 through 12/31/2020.
- Paid Sick leave credit is available at the employee’s regular rate of pay up to $511 per day and a maximum of $5,110 in total for up to 80 hours. This is if an employee is unable to work due to COVID 19 symptoms/diagnosis and is subject to isolation/quarantine order or ordered to self-quarantine due to COVID 19.
- Paid Sick Leave credit is also available if an employee is unable to work because they are taking care of someone subject to a COVID 19 isolation/quarantine/self-quarantine order or taking care of a child whose school/daycare is closed due to COVID 19 or whose care provider is unavailable due to COVID 19. The credit is available for two-thirds of the employee’s regular rate of pay up to $200 per day or a maximum of $2000 for up to 80 hours.
- Paid Family Leave credit is available if an employee is unable to work because they are taking care of a child whose school/daycare is closed due to COVID 19 or whose care provider is unavailable due to COVID 19. The credit is available for two-thirds of the employee’s regular rate of pay up to $200 per day or a maximum of $10,000 in total. Up to 10 weeks of qualifying leave and can be counted for this purpose. It can also be combined with sick leave of two weeks for a total of 12 weeks of qualifying leave.
- Under the American Rescue Plan Act (“ARPA”), which was enacted on March 11, 2021 employers can voluntarily extend FFCRA paid leave from April 1 through September 30, 2021, and still receive a tax credit.
- ARPA changes the rules for Emergency Paid Sick Leave (“EPSL”) and Emergency FMLA Extension.
- Under the EPSL, in addition to the previous 6 reasons for leave, you must allow leaving for 3 more reasons, namely:
- When the employee is seeking or awaiting results of a COVID-19 test or diagnosis;
- When the employee is obtaining a COVID-19 vaccine;
- When the employee is recovering from an injury, disability, illness, or condition related to the COVID-19 vaccine.
EPSL also includes a fresh 10-day bank of leave effective April 1, 2021.
For any support on the filing for Employee Retention Credits, please feel free to reach out to GKM’s professionals at https://www.gkmtax.com and info@gkmtax.com.
