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Recap of New, Significant COVID-19 Employer Tax Credits

January 28, 2021

There have been so many continual changes during the past year that it seems noteworthy to provide a simple recap of several new, more significant tax credits available to employers. This will hopefully provide clarity and ensure understanding of the maximum benefits available.

COVID-19 sick and leave pay
Through December 31, 2020, employers were required to pay sick or leave compensation to employees that either had COVID-19, were required to quarantine, or were taking care of others dealing with COVID-19, including a child unable to attend school or receive childcare due to a closed facility or unavailable care provider. In turn, payroll tax credits were available to employers to fully subsidize these costs.

We heard from some employers that did not realize the significance of these credits, so here are a few key things to remember:

  • The credits are for 100% of the wages paid to the employee, PLUS the allocable share of health care costs paid during their absence. This is not merely a deferral, but full reimbursement of the wages and healthcare costs paid.
  • Self-employed individuals can also claim this credit if they were personally unable to work because of the above COVID-19 impacts.
  • Despite the mandated pay ending on December 31, the credits continue to be available through March 31, 2021 for employers that choose to continue paying employees for these absences.
  • These wages are not subject to the employer Social Security match (6.2%).
  • The quickest way to obtain these credits is by reducing the Federal payroll taxes you remit to the IRS. This reduction is factored into your Federal quarterly payroll tax reporting on Form 941.
  • If you failed to reduce your payroll tax remittance or claim the credits on your 2020 Forms 941, you can amend those by filing Form 941-X and secure a refund. If the amount of payroll taxes you paid was not enough to fully utilize the available credits, you can use Form 7200 to claim the balance.

Read more about these credits here.

Employee retention credit
For employers that continued compensating employees, despite taking a significant hit stemming from COVID-19, an employee retention credit may be available. While this credit was rolled out as part of the CARES Act in March 2020, it was largely ignored by smaller employers, because it was not available to companies that secured a PPP loan.

However, that prohibition was eliminated with the signing of the Consolidated Appropriations Act (CAA) on December 27, 2020. Furthermore, this expansion was made retroactive to 2020. This means that many employers that did not qualify for the credit initially may now be eligible to go back and claim these credits for 2020.

To be eligible, the company’s operations either had to be fully or partially suspended, or it had to experience a reduction in its revenues of more than 50% compared to 2019.

In addition, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as part of the CAA, extended this credit through June 30, 2021. The extension not only enhanced the amount of the credit, it also lowered the bar for businesses to qualify. Specifically, instead of a required drop in revenues of more than 50%, a drop of more than 20% is sufficient.

While IRS guidance is still needed on the procedures to amend Forms 941 to secure this credit for 2020, employers should go ahead and determine their eligibility for the 2020 credit and keep an eye on this year’s 1st and 2nd quarter operations to see if they qualify for the enhanced 2021 credit.

Read more about this credit here.

Recording these credits
Employers have also asked how to record the sick pay and employee retention credits on their books. While there is no prescribed method, it may make sense to record both as “other income” on the income statement (similar to how interest income or gain/loss on sale of assets are recorded). That way, expenses capturing wages, healthcare costs and employer payroll taxes are not affected and will be more comparable to future or previous periods.

These credits can be complex to understand and report, but they can also provide very significant savings to employers. We recommend consulting your payroll service provider and/or tax advisor to ensure you maximize the credits available to you.

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To listen to January 28, 2021 recording of What You Need To Know For The New PPP podcast with guest presenter JPS Vice President of Tax Services Rollin Groseclose, click here. 

To read other JPS COVID-related articles, click here. 

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And, as always, feel free to contact our JPS team to assist you.

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