Congress has enacted three tax credits that can provide some relief to eligible employers at this difficult time. The credits were initiated by three separate pieces of federal legislation and it's easy to confuse one with another. The following is intended to provide some clarity.
This credit was created by the Tax Cuts and Jobs Act (TCJA) before COVID-19 was a global pandemic. Initially, it was scheduled to be effective for the 2018 and 2019 tax years. But after the pandemic began, 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. Significantly, 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 IRS specifies that family and medical leave can be extended for one or more of the following reasons:
The credit percentage, which depends on the level of an employee's pay, ranges from 12.5% to 25% of wages. Be aware that this credit is available only for wages paid to employees who have worked for your organization for at least one year and have received no more than $72,000 in compensation (indexed for inflation) the previous year.
The ERC is authorized by the Coronavirus Aid, Relief and Economic Security (CARES) Act, which was passed in March 2020. 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. It's a refundable credit that offsets the 6.2% Social Security tax portion of payroll tax.
Your organization is eligible for the ERC if it fully or partially suspends operations during any calendar quarter due to government orders relating to COVID-19 or if it experiences a significant decline in gross receipts. For this purpose, a "significant decline" occurs when 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.
What constitutes qualified wages depends on the number of employees who worked for you in 2019. For example, if your organization averaged more than 100 full-time employees during 2019, qualified wages generally 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.
What if your organization averaged 100 or fewer full-time employees during 2019? Qualified wages are the wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether employees are providing services
The Families First Coronavirus Response Act passed before the CARES Act. It 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 "double dip." In other words, you aren't allowed to claim the credit if your organization is receiving the TCJA family and medical leave credit for the same amounts.
If you're confused about the tax credits currently available to employers, you're not alone. It's been a tough year for everyone, but your professional advisors can help clear up confusion about 2020 business taxes. Contact us today.
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