Coronavirus Tax Credits: What You Should Know About Employee Retention & Families First Credits
If you’re a small business owner that has been affected by the COVID-19 pandemic, you’ve likely sought resources for funding to help your business through this difficult time. The Coronavirus Aid, Relief, and Economic Stability (CARES) Act may be of interest to business owners like you. This legislation was passed by the US government to help taxpayers and small business owners receive financial relief as businesses have shuttered and workers laid off.
For small business owners, there are quite a few benefits included in the CARES Act. You’ve probably heard of the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) — both funding options for small businesses impacted by the coronavirus. But the CARES Act offers additional opportunities to put money back in your pocket with tax credits.
In addition to the CARES Act, employers affected by the coronavirus can also take advantage of the tax credits available through the Families First Coronavirus Response Act (FFCRA).
Whether you’re looking for an incentive to keep your business fully staffed or you need extra funds to keep your business afloat, these credits may be of interest to you. In this article, we’re going to take a look at two tax credits available for small business owners that have been affected by the coronavirus. We’ll talk about qualifying and calculating tax credits and provide additional information and resources to help your business. Keep reading to take the first step toward financial relief.
Table of Contents
The Employee Retention Tax Credit
The CARES Act has provided financial relief with small business loans to help employers cover payroll and other qualified expenses. But an additional financial benefit that shouldn’t be overlooked is the Employee Retention Tax Credit. Keep reading to learn more about how this tax credit can help your business overcome the fallout from the coronavirus.
What Is The Employee Retention Credit?
The Employee Retention Tax Credit (ERTC) is a provision in the CARES Act that provides a tax credit to qualified employers. This credit is an incentive for employers to keep their businesses staffed without laying off or furloughing employees. With this credit, employers can claim 50% of qualified wages paid to their employees. We’ll discuss limitations and how to calculate the amount of the ERTC a little later.
Do I Qualify For The Employee Retention Credit?
To claim the ERTC, you must meet several requirements.
Be An Eligible Employer
To be eligible to claim this credit, you must be an eligible employer as defined by the IRS. To be eligible, one of the following must be true:
- The business must have fully or partially suspended operations in 2020 as a result of a government mandate due to COVID-19
- The business must have seen a significant decline in revenue for the quarter
In other words, if your business was shut down by a local, state, or federal government because of the coronavirus, you are eligible for this credit. If your business was still in operation but experienced a drop in revenue for the quarter (a decline of 50% or more when compared to the same quarter in 2019), your business is also eligible.
Number Of Employees
The ERTC is available to businesses of all sizes. However, there are some differences in how your credit is calculated based on your business’ number of employees. We will go into more detail on these limitations in the next section.
Private Businesses Or Tax-Exempt Organizations
To receive the ERTC, your business must fall under one of the following categories:
- Private sector for-profit business
- Tax-exempt organizations that participate in a trade or business (including tribes and tribal entities)
The following businesses are not eligible to receive the ERTC:
- Federal, state, and local governments
- Self-employed individuals
- Household employers
There are some exceptions, however. For example, while a self-employed individual can’t claim a tax credit for their own earnings, they may be able to do so if they have employees participating in their trade or business that meet all other eligibility requirements.
If you have received a Paycheck Protection Program loan, you are ineligible to receive the ERTC. The only exception is small businesses that received a PPP loan and repaid it by May 14, 2020. If you receive the ERTC, you are ineligible to apply for the PPP. You can, however, still claim the ERTC if you received or plan to apply for the Economic Injury Disaster Loan.
How To Calculate The Employee Retention Credit
The ERTC allows you to claim 50% of qualified wages (including qualified health benefits) paid for each eligible employee. These wages must have been paid between March 13, 2020, through December 31, 2020. This credit can be claimed on up to $10,000 in wages per employee. This means that the maximum credit that can be claimed per employee is $5,000.
While there are no limitations on the business that claims the ERTC, there are two different calculations based on the number of employees.
100 Or Fewer Full-Time Employees
If your business has up to 100 full-time employees, wages paid to all qualified full-time employees are eligible to claim under the ERTC.
For example, your business has 10 employees. Each employee was paid wages and/or health benefits of at least $10,000. You can claim 50% of these wages per employee — a credit of $5,000/employee. With 10 employees, you could claim $50,000.
For businesses of this size, health plan expenses can be counted as qualified wages, even if employees are not working or being paid wages by the employer.
More Than 100 Full-Time Employees
If your business has more than 100 full-time employees, you will calculate your ERTC differently. The ERTC is calculated by using the wages of full-time employees who have not been working as a result of government closures or a significant drop in revenue as a result of the coronavirus.
You can claim 50% of wages for each qualified employee.
As an example, let’s say your business has 110 employees. Your revenues have dropped by more than 50%, and you have to reduce your staff. Thirty employees are not working but are still receiving pay, and each employee is earning $5,000 during this period. You can claim 50% of these qualified wages (or $2,500/employee). For 30 employees, this would be $75,000 in tax credits that your business could claim.
For health plan expenses, businesses of this size can only claim credit for employees that were laid off or furloughed without pay.
Another tax credit that businesses can claim is under the Families First Coronavirus Response Act. This FFCRA provides a tax credit to eligible employers for paid medical and family leave due to the coronavirus. Keep reading for the breakdown of how this credit works.
What Is The Families First Coronavirus Response Act?
The FFCRA is a tax credit that qualified employers can claim for employees who have taken medical or family leave as a result of COVID-19.
Employees that have been exposed to the coronavirus or are taking care of a family member with the coronavirus put others at risk when they come into work. However, missing a paycheck may not be feasible for the employee. The FFCRA helps employers provide coronavirus-related family and medical leave without putting a financial burden on the business.
Do I Qualify For The FFCRA Credit?
Is the FFCRA credit an option for your business? It may be if you meet the following requirements.
Size Of Business
The FFCRA credit is available to private organizations and select public companies with fewer than 500 employees. This includes both full- and part-time workers.
No Revenue Or Shutdown Requirements
Unlike the ERTC, claiming the FFCRA tax credit does not have shutdown or revenue requirements. If your business is required to provide sick time and family leave to employees, you may be eligible for this credit.
You can apply for and receive the PPP loan and still receive the FFCRA tax credit. However, it should be noted that any sick or family leave wages paid during the eight week PPP funding period are not eligible for loan forgiveness.
Claiming ERTC & FFCRA
Employers can claim both the ERTC and FFCRA tax credits for eligible employees. However, you can not claim both credits for the same employee on the same day.
How To Calculate The Sick & Family Leave Credit
Calculating this tax credit can get a little confusing. So we’ll break down each section to make it easier to understand.
Paid Sick Leave
Employers can receive a credit equal to 100% of wages paid to employees for coronavirus-related sick leave. Employers may receive credits for wages paid for up to 10 days (for a total of 80 hours) per employee. This applies to any employee who has taken sick leave to:
- Quarantine or self-quarantine as a result of the coronavirus
- Seek medical attention after showing symptoms of the coronavirus
Employers can also receive credit for eligible healthcare plan expenses and the employer’s share of Medicare taxes imposed on paid sick leave wages.
The maximum credit per employee is $511/day and up to $5,110 for the entire sick leave period. To qualify for this credit, wages must be paid between April 1, 2020, and December 31, 2020.
Example: An employee’s regular rate of pay is $200/day. The employee shows possible symptoms of the coronavirus and seeks medical attention. The employee is off for five days before receiving negative test results and is allowed to return to work. The employee was paid for sick leave during this time. The total credit you as the employer may claim is $1,000 plus eligible healthcare expenses and your share of Medicare taxes on these wages.
There are times when an employee is healthy but may have to take family leave. Through the coronavirus pandemic, some reasons that employees take family leave are:
- Caring for a family member that has self-quarantined or is following a government-ordered mandate related to the coronavirus
- Caring for a child whose school or place of care is closed as a result of the coronavirus
Under the FFCRA, employees receive 1o days (up to 80 hours) of paid family leave. Pay rate is two-thirds of the employee’s rate of pay or minimum wage, whichever is greater. Each employee can be paid up to $200/day or a maximum total of $2,000. Employers can claim 100% of these funds as a tax credit. Employers can also receive credit for eligible health plan expenses and their own portion of Medicare taxes for the period when family leave wages are paid.
In addition to the two weeks mentioned above, families that have been affected by the coronavirus can receive up to 10 additional weeks of paid family leave. Wages are two-thirds of the employee’s regular rate or minimum wage, whichever is greater. Employees may receive up to $200/day or a maximum of $10,000 paid out over ten weeks. Employers can receive a credit for 100% of these wages, plus credits for eligible health plan expenses and Medicare taxes.
To summarize, workers can receive up to 10 days of sick leave or up to 12 weeks for family leave. All wages paid can be claimed as a tax credit by the employer. Let’s take a look at an example.
Your employee has been exposed to the coronavirus and is self-isolating while getting tested. The employee’s regular rate of pay is $180/day. The employee uses the full 10 days of sick leave and receives payment of $1,800 (100% of their regular wages).
During this time, the employee tested negative for the coronavirus. However, their regular childcare provider is not working due to a shutdown, and the employee has no other childcare options. The employee has to care for their child while seeking out alternative childcare. The employee uses three weeks of family leave for this purpose. The employee is paid at two-thirds of their regular rate ($120/day) for three weeks for a total of $2,700.
Now, add the total wages from sick leave ($1,800) and the total from family leave ($2,700). The total wages paid to this employee were $4,500 — 100% of which you can claim as a tax credit.
How To Get Your Tax Credits
Hopefully, you now have an understanding of these two major tax credits and how they are calculated. The next step, then, is to figure out how to get these credits. Let’s explore this process step-by-step.
Before you claim your tax credits, make sure that you understand the documentation requirements. For every employee that has taken paid family or sick leave, you must have a document that includes:
- The legal name of the employee
- Dates requested for leave
- Reason for leave
- An employee statement stating that he or she is unable to work for that reason
If the employee is taking leave as a result of quarantine, self-quarantine, or to care for a quarantined family member, document either:
- Name of the government entity that issued the quarantine order OR
- The name of the healthcare provider that recommended self-quarantine
If the employee is taking leave as a result of a child not being in school or daycare for coronavirus-related reasons, document:
- The legal name of the child
- Name of the school or daycare facility
- An employee statement stating that there is no other care available for the child
Claiming The Employee Retention Credit
To claim the ERTC, you can reduce the deposits you make toward employment taxes. When filing your quarterly taxes, you will report the eligible wages and associated healthcare plan costs on IRS Form Employer’s Quarterly Federal Tax Return. If the amount of the credit exceeds the amount of required employment tax deposits, this is an overage that will be refunded by the IRS.
If you have run your calculations and will have an overage, you can request an advanced refund by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.
The IRS offers a number of resources related to calculating and claiming the ERTC, so if you’re still unsure of how to proceed, don’t hesitate to check out these resources.
Claiming The FFCRA Tax Credit
Claiming the FFCRA tax credit is pretty much identical to claiming the ERTC. You can withhold federal employment tax deposits when paid leave begins. Eligible wages, healthcare plan costs, and your share of Medicare taxes can then be reported on your quarterly tax forms.
If there is an overage after federal employment tax deposits have been covered by the tax credit, you will receive a refund of this overage from the IRS. You can also file IRS Form 7200 to request an advance of this overage.
Additional Help & Resources
There are also some great resources available through the IRS and Department of Labor. At Merchant Maverick, we’ve also stayed up-to-date on the latest coronavirus aid and resources for small business owners. This information is compiled in our COVID-19 hub.
Finally, don’t forget that there aren’t just tax credits for businesses affected by the coronavirus. There’s also a number of business tax deductions you could be overlooking, so take a minute to learn more about these money-saving credits. And, of course, if you’re unsure of what credits your business can claim, it’s never a bad idea to consult with an accountant. Good luck!