Coronavirus payroll tax credits are no longer in effect. Congress passed the Infrastructure Investment and Jobs Act, which President Biden signed on November 15, 2021. The new expiration date of the ERTC is September 30, 2021 for most businesses. Paid leave credits expired on September 30, 2021.
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.
The American Rescue Plan (ARP) extended paid leave through September 30, 2021. It also extended the Employee Retention Credit to December 31, 2021 and expanded the credit. The Consolidated Appropriations Act (the Act or CAA) was signed into law on December 27, 2020. The new legislation expanded the Employee Retention Credit.
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: 12 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:
- Qualified health plan expenses allocable (i.e., the cost of maintaining coverage for the employee on leave) to the leave wages
- Employer’s share of Medicare tax on the leave wages
This means your total tax credit claim can include the:
- Paid leave you give the employee
- Employer Medicare tax on the leave wages
- 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 – September 30, 2021.
| 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 you provide paid sick and family leave to employees under the FFCRA or American Rescue Plan, you are eligible for the tax credits.
You can claim the paid leave credits if you:
- Have fewer than 500 employees
- 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 during the allowed time period 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 my FFCRA and ARP tax 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, report the total qualifying leave wages, health plan expenses associated with those wages, and employer share of Medicare tax on the leave wages.
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 ARP, and CAA, eligible employers able to keep employees on their payroll can claim the Employee Retention Credit.
Under the CAA, the Employee Retention Credit is a refundable tax credit equal to 70% of qualifying wages, up to $10,000 per employee, employers pay to their employees in 2021, through September 30, 2021.
The maximum credit amount in 2021 is $7,000 per employee for all calendar quarters.
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:
- Fully or partially suspended operations as a result of orders from a governmental authority due to the coronavirus
- Experienced a significant decline in gross receipts
Under the ARP, new startups established after February 15, 2020 with annual gross receipts of up to $1 million can also claim the credit. Businesses that experienced a revenue decline of 90% or more (compared to the same calendar quarter of the previous year) can also claim it.
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 that reduces 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 500 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 500 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 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.
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.