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COVID-19 Tax Relief: How to Maximize Your 2020 Credits

By Angela Bao
Oct. 13, 2020
How small businesses can maximize their 2020 tax credits.(Photo credit): Gettyimages.com/aaaaimages

Experts break down coronavirus tax provisions that help small businesses maximize benefits to combat the effects of the pandemic.

After the COVID-19 pandemic hit the United States and many states and cities had to go into lockdowns, the U.S. government announced a number of measures to help small and mid-sized businesses ride out the downturn. Along with the CARES Act that provided forgivable loans via the Small Business Administration’s Paycheck Protection Program, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law.

The FFCRA, which is effective until December 31, 2020, requires certain small and mid-sized businesses to provide employees with paid sick and expanded family leave, should they or one of their family members become ill with the coronavirus. However, these acts also allow businesses to take a refundable tax credit for any COVID-related paid sick and/or family leave they provide to employees. In addition, the CARES Act also includes an employee retention credit for certain employers. Here’s a breakdown of how your business can get the most out of these credits.

Breakdown of EPSLA & EFMLEA

The FFCRA has two provisions that pertain to medical leave: the Emergency Paid Sick Leave Act (EPSLA) and the Emergency Family and Medical Leave Expansion Act (EFMLEA). The provisions require most small and mid-sized businesses with fewer than 500 employees, including nonprofits, to provide paid sick and family leave for certain COVID-related reasons, but also allow businesses to receive fully refundable tax credits for qualified wages related to leave.

Under FFCRA, businesses have to provide the following for their employees:

  • Two weeks, or up to 80 hours, of paid sick leave at the employee’s regular rate of pay, if the employee can’t work because they are quarantined due to federal, state or local government orders, or at the advice of a health care provider; and/or they are experiencing COVID symptoms and seeking medical diagnosis.
  • Two weeks, or up to 80 hours, of paid sick leave at two-thirds of the employee’s regular rate of pay, if the employee needs to care for someone who is subject to quarantine due to federal, state or local government orders, or at the advice of a health care provider; or if they must care for a child under 18 whose school or child care provider is unavailable due to COVID-related reasons; or if the employee is experiencing “any other substantially similar condition.”
  • Up to an additional 10 weeks of paid expanded family and medical leave at two-thirds of the employee’s regular rate of pay, if an employee needs to care for a child whose school or child care provider is closed due to COVID-related reasons. In this instance, the employee must have been employed by the employer for at least 30 calendar days to qualify.

Under the FFCRA, the provisions don’t pertain to health care workers and emergency responders, says Corey Walton, community outreach and resource planning specialist at the Department of Labor. The FFCRA covers part-time, full-time and temporary employees, but does not extend to employees outside of the United States.

Calculating qualified wages under FFCRA

In order to determine how much your tax credit is, you have to add together how much qualified leave you’ve paid, qualified health plan expenses and the employer’s share of the Medicare tax (1.45% of wages).

Reasons that qualify for employee leave under FFCRA

First, you need to determine how much you need to pay your employees for their qualified leave. To do that, you need to know what counts as qualified under FFCRA.

Walton says it’s easiest to break it down to six reasons:

  1. The employee is under local, state or federal orders to quarantine, due to COVID-19.
  2. The employee has been advised by a health care provider to quarantine due to concerns related to COVID-19.
  3. The employee is experiencing COVID-19 symptoms and seeking medical diagnosis.
  4. The employee is caring for someone who is under local, state or federal orders to quarantine due to COVID-19, or has been advised by a health care provider to quarantine.
  5. The employee is caring for his or her child, due to the child’s school or child care provider being unavailable due to COVID-19.
  6. The employee is experiencing any other substantially similar condition as defined by the U.S. Department of Health and Human Services.

For reasons one, two or three, Walton says employers must pay 100% of the employee’s hourly pay rate. If an employee takes leave for reasons four, five or six, the employer only needs to pay two-thirds of that rate. For example, if an employee makes $15 an hour, then they would receive the full $15 an hour for however many hours they’ve taken leave under reasons one, two and three. If that same employee takes leave for reasons four, five or six, then the employer only needs to pay $10 an hour.

Each reason has a cap for how much a business can claim as a tax credit. For reasons one through three, the total pay is capped at $511 per day, or $5,110 in total. For reasons four through six, total pay is capped at $200 per day, or $2,000 total.

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Walton notes that the pay rate is applicable to the highest pay rate possible, whether that’s the employee’s normal rate, the Fair Labor Standards Act minimum wage, or state or municipal minimum wage.

Qualified health plan expenses include how much a business paid to maintain a group health plan and “the amounts of the employee portion of the cost paid with pre-tax salary reduction contributions” (after-tax employee contributions are not included). If you sponsor multiple plans, then qualified expenses will be determined separately depending on which plan the employees are on.

Employee retention credit

Similar to the Paycheck Protection Program, the employee retention credit was created to encourage businesses to keep employees on payroll, says Yolanda Ruiz, stakeholder liaison at the Internal Revenue Service.

“That (the employee retention credit) is fully refundable, meaning that employers can take advantage of this, even now,” explains Ruiz. “And they can get an advance payment of the credit.”

There are two types of employers that are eligible for the credit:

  1. A business that was fully or partially suspended in 2020 by government order due to COVID-19 that limited commerce, travel or group meetings.
  2. A business that experienced a significant decline in gross receipts (if their gross receipts for a quarter was less than 50% in the same quarter in 2019).

“The credit is 50% of qualified wages of up to $10,000, for a maximum credit per employee of $5,000 for the 2020 year,” Ruiz states. However, she notes that not all employers can claim the employee retention credit: self-employed individuals cannot claim it for their own services and earnings, as cannot local, state or government employers. Businesses that have received a PPP loan also cannot claim the employee retention credit, she adds.

To determine qualified wages, employers can only use the wages paid to employees from March 13, 2020 through December 31, 2020, which include qualified health plan costs. For businesses with 100 or fewer employees, the credit is based on wages paid to all employees, regardless of whether or not they provided services. For businesses with over 100 employees, the credit is only based off of wages paid to employees for the time they were not providing services.

“The way that an employer can get an immediate benefit of this credit is that you can take the tax credit and claim it against the payroll tax deposits that are otherwise required to be made,” shares Ruiz. “If the credit exceeds these deposits, then you would file a Form 7200, Advanced Payments of Employers Credits.”

Ruiz gives an example of a business that wants to take a $10,000 credit and has $15,000 of payroll tax deposits that they are required to make. “In this case, the employer can apply the credit against the tax deposits of $15,000, so they would only have to deposit $5,000,” she says. “But in the situation where the credit is larger than the payroll tax deposits—say, for instance, the credit was $15,000 and the payroll [tax] deposit was $10,000—it would completely offset the payroll [tax] deposits and there would be $5,000. That’s when you would use Form 7200 to claim that.”

Employer tax deferrals

Although the employee tax deferrals are not a credit, Ruiz says that doing so can really help a business with its cash flow during this crucial time.

“As an employer, you may know that you’re responsible for paying half of the Social Security taxes on your employees’ wages, and that comes out to 6.2%,” she says. “Well, the CARES Act provided that employers can defer the deposit in the payment of this tax without penalty—and this refers to wages paid from March 27, 2020 through December 31, 2020.”

Ruiz adds that businesses can use this deferral for all employees, and that self-employed individuals can also take advantage of it.

How to maximize your benefits

In most cases, you cannot claim “double benefits” for your business, says Ruiz. However, there is a way to maximize your benefits.

“Take the employer tax deferral first, and then take the paid family and sick leave second,” she advises, since the employer tax deferral can be calculated prior to taking any other credits. Since businesses that have received PPP loans cannot receive an employee retention credit, it’s best if you take the employee retention credit into account last.

For more tips go to our business continuity toolkit with the latest resources on how to deal with the pandemic

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