During April 2021, the Internal Revenue Service (“IRS”) issued updated guidance for employers regarding the Employee Retention Credit (“ERC”) and credits for paid sick and family leave (“Paid Leave”).
Employee Retention Credit
On April 2nd, 2021 the IRS published Notice 2021-23, which explains the changes to the Employee Retention Credit for the first two calendar quarters of 2021. Eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. This means that eligible employers are able to claim up to $14,000 per employee for the first two quarters of 2021. An employer is eligible to claim the credit if (1) business operations are either fully or partially suspended by a COVID-19 lockdown order, or if (2) for a quarter in 2021, gross receipts are less than 80% of gross receipts for the same quarter in 2019.
Under the American Rescue Plan Act of 2021 (“ARP”), enacted March 11, 2021, the ERC is also available to eligible employers for wages paid during the third and fourth quarters of 2021. The IRS has said that they will issue more guidance on this at a later date.
Paid Sick & Family Leave
The ARP allowed small and midsize employers, and certain governmental employers, to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. Last spring, in response to the coronavirus pandemic, Congress enacted the Families First Coronavirus Response Act which provided for similar paid leave credits which were set to expire on December 31, 2020. The credit was later extended through March 31, 2021. The ARP expanded the tax credit availability through September 30, 2021 while also making some minor changes to the leave benefits. The tax credits are available to eligible employers that pay sick and family leave for leave when employees who are not able to work or telework due to reasons related to COVID-19, these reasons include the following:
- The employee is subject to a government quarantine or isolation order.
- The employee has been advised by a health care professional to self-quarantine.
- The employee is experiencing COVID-19 symptoms and seeking a medical diagnosis.
- The employee is caring for an individual who is subject to a government quarantine or isolation order, or who has been advised to self-quarantine by a health care professional.
- The employee is caring for a son or daughter whose school or place of care has been closed or whose childcare provider is unavailable.
One of changes made by the ARP is that employers are also eligible to claim paid leave credits when leave is taken to receive COVID–19 vaccinations or to recover from any injury, disability, illness, or condition related to the vaccinations. Second, ARP “refreshes” paid leave eligibility as of April 1, 2021, meaning an employee who exhausted their eligibility for paid leave will be eligible for additional leave. Third, the ARP increased the tax credit limit for covered wages for expanded family leave. The tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, limited to $200 per day and $12,000 in the aggregate, at two-thirds of the employee’s regular rate of pay. The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons for up to two weeks (80 hours), limited to $511 per day and $5,110 in the aggregate, at 100 percent of the employee’s regular rate of pay. Lastly, the ARP places restrictions on receiving credits if an employer does not uniformly offer paid leave to all employees regardless of job title or seniority.
How to Claim the Credits
Eligible employers are able to claim the ERC by reducing employment tax deposits on their federal employment tax return (typically a Form 941). Employers who are claiming paid leave credits also claim the credit on their federal employment tax return by reporting their total paid sick and family leave wages. Eligible employers can keep the federal employment taxes that they otherwise would have deposited. For paid leave this includes including federal income tax withheld from employees, the employees’ share of social security and Medicare taxes and the eligible employer’s share of social security and Medicare taxes up to the amount of credit for which they are eligible. Also, both credits are refundable, which means if your business does not have a large enough payroll tax liability to use the credit, the IRS will send you a check for the remaining amount of the credit. Employers with an average of 500 or fewer full-time employees in 2019 can request an advance payment of the credit using a Form 7200, but such employers will still need to reduce tax deposits in anticipation of the credit before requesting an advance.
If you should have any questions about your business’s eligibility for the employee retention tax credit or credits for paid sick or family leave, please give us a call at (404) 365-5682.