By: Maddie Schueler, JD, LLM | mschueler@deandorton.com
Two payroll tax credits established earlier this year are set to expire at the end of 2020. On March 18, the Families First Coronavirus Response Act (FFCRA) created refundable payroll tax credits for employers to offset the cost of providing coronavirus-related sick and family leave. Less than two weeks later, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established the employee retention credit as an alternative to the Paycheck Protection Program (PPP) and an incentive to employers to keep employees on their payroll. Absent further legislation, both credits will expire on December 31.
Paid Sick and Family Leave Tax Credits
Under the FFCRA, most government employers, tax-exempt organizations, and private employers with fewer than 500 employees are required to provide employees with paid sick and family leave for specific coronavirus-related reasons. To offset the cost of providing this leave, employers are entitled to payroll tax credits equal to 100% of paid sick and family leave wages. The credits are taken against the employer’s share of Social Security tax; however, they are refundable, which means employers can receive a refund if the amount of the credits exceeds the employer’s tax liability.
Learn more about paid sick and family leave credits
The requirement to provide paid leave took effect April 1 and ends on December 31, 2020. The payroll tax credits are available for wages paid to employees for leave taken during this time.
The Employee Retention Credit
The CARES Act created the employee retention credit to incentivize employers to keep employees on their payroll despite experiencing economic hardship. Like the paid sick and family leave credits, the employee retention credit is refundable and applies against the employer’s share of Social Security tax. Employers may be eligible for the credit if their business operations were partially or fully suspended by government order due to coronavirus or if they have experienced a significant decline in gross receipts compared to 2019. Businesses that received a PPP loan are not eligible for the credit.
The credit is equal to 50% of qualified wages paid to employees, subject to a maximum credit of $5,000 per employee. For more information on the employee retention credit, including how to determine qualified wages and other eligibility requirements, click the button below. The credit applies to wages paid after March 12, 2020, through and including December 31, 2020.
Learn more about employee retention credit
Both the paid sick and family leave credits and employee retention credit are claimed on the employer’s payroll tax return. For most employers, this is Form 941. The IRS also created a process for employers to claim the credits more quickly by reducing their employment tax deposits and filing a form to request an advanced refund. If you have not been claiming these credits but believe you may be eligible, now is a good time evaluate your eligibility. It may be possible to amend your prior payroll tax returns and seek a refund for any overpayment.
This article was originally published in News & Views (Dean Dorton’s quarterly newsletter).