COVID-19-Related Tax Credits and the New Form 941
The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) encourage employers to retain employees while experiencing economic hardship in their businesses. These acts provide small and midsize employers with many different options to assist them in maintaining their business cash flow in these difficult times. The Employee Retention Credit (ERC) and the Qualified Sick and Family Leave credits are payroll credits that have received much media attention. Both credits are claimed on quarterly employment tax returns (Form 941). Form 941 has been redesigned to allow for these credits beginning with the 2020 second-quarter filing due July 31, 2020. To benefit more quickly from these credits, employers may also reduce their federal employment tax deposits.
An employer may receive both of these credits but not for the same wages and may not receive either credit if the employer received a Paycheck Protection Program (PPP) loan.
Employee Retention Credit
The ERC is a refundable credit against the employer’s portion of the social security taxes on employee wages. The credit is equal to 50% of qualified wages paid to employees during March 13, 2020, through January 1, 2021. The maximum wages for each employee is $10,000 for a maximum employer credit of $5,000.
Qualified wages include compensation and health plan expenses paid to employees for the time they do not provide services due to the suspended operations or a decline in gross receipts.
This credit is allowed against the employer’s share of social security taxes on the revised Form 941 as nonrefundable and refundable portions on lines 11c and 13d, respectively. The credit is calculated on Worksheet 1 and carried to the corresponding lines on Form 941. The credit can be refundable if it is more than the amount of federal employment taxes owed by the employer, these amounts would go to line 13d.
Qualified Sick and Family Leave Wages
Qualified sick leave wages are wages paid to an employee unable to work or telework due to their health or the need to care for another person. Family leave wages are wages paid to an employee who is unable to work or telework because they are caring for a child whose school or daycare is closed for COVID-19 related reasons.
The credit covers 100 percent of qualified sick leave wages for up to ten days, and up to ten weeks of qualified family leave wages.
The credit is calculated on Worksheet 1 and is carried to lines 11b and 13c on Form 941.
Businesses with fewer than 50 employees can claim an exemption from providing paid sick leave or family leave if providing these wages would jeopardize the business.
Delay Deposits and Payments of Employer Payroll Taxes
Employers can benefit more quickly from the above credits by reducing their federal employment tax deposits. The CARES Act allows employers to defer the deposit and payment of the employer share of social security taxes that would typically be due during the quarter into 2021 and 2022.
Deposits of the employer’s share of the social security tax required to be made beginning on March 27, 2020, through December 31, 2020, can be delayed. Employers will be required to repay 50% of the deferred tax by December 31, 2021, and the remaining 50% by December 31, 2022. Self-employed individuals can delay their 50% social security tax by short-paying their estimated payments each quarter. To take advantage of this deferral employers should indicate the amount they are deferring on line 13b.
Employers that received a loan under the PPP may not defer the deposit and payment after the employer has received a decision that the loan was forgiven. Any amounts deferred before having a loan forgiven are still allowed to be deferred. As of this writing, Form 941 has not been finalized by the IRS. Worksheet 1 that is included in the instructions for the 941 will be a key to computing which credits you are eligible for and how much you would receive.
If you believe your business may qualify for the ERC, the Qualified Sick and Family Leave Credit, or a Delay in Deposit of Employer Taxes, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The above represents our best understanding and interpretation of the subject matter covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This material is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.