Knowledge and Insights
Due to the COVID-19 pandemic, the IRS announced a payroll tax credit as well as other relief over the past few months. With the 2020 second quarter payroll tax return due dates approaching, below are highlights of these potential benefits and tax reporting changes that you should be aware of.
Employee Retention Credit – Qualifications & 941 New Worksheet 1
The Treasury Department and the IRS launched the Employee Retention Credit on March 31, 2020 to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of wages paid up to $10,000 per employee by an eligible employer whose business has been financially impacted by COVID-19. The credit is available to all employers regardless of size, including tax-exempt organizations with the exception of state and local governments AND, businesses who take the PPP loan.
Qualifying employers must fall into one of two categories:
- Full or partial suspension of operations ordered by the government during the calendar quarter.
- Significant decline in gross receipts during the calendar quarter.
- Gross receipts for calendar quarter in 2020 are less than 50% of what they were the for the same quarter of 2019.
- Once a business qualifies, they continue to qualify until the quarter. in which the gross receipts return to more than 80% of what they were for that quarter of 2019.
If your business has multiple locations and full or partial shutdown applies to one location, the entire business qualifies under category 1.
Qualifying wages are based on the number of employees in 2019 and are calculated on a per employee basis for wages paid between March 13, 2020 and December 31, 2020.
- Businesses with less than 100 employees – can consider wages paid to all employees including those who receive full pay. Health insurance costs also count towards the $10,000 per employee compensation.
- Businesses with 100 or more employees – can only consider wages paid (and health insurance costs) to employees who are not working but were still paid.
The advanced credit is available on Form 7200 and must be reconciled on form 941 for the period ending June 30, 2020. If you did not receive an advance credit, you may calculate your credit on the second quarter (and future 2020 quarters) Form 941. You will need to gather additional information for use in preparing the second quarter 941 Form.
Families First Coronavirus Response Act (FFCRA) – businesses with fewer than 500 employees are required to provide emergency paid sick leave and extended family leave to employees who are directly impacted by COVID-19 (unless they qualify for an exemption). The paid leave can be funded with a credit against the employer’s share of federal payroll taxes.
Paid Sick Leave – Is capped at 80 hours over a 2-week period. Paid sick leave is available to employees who are unable to work (or telework) because they are sick or are caring for a sick family member for the following reasons:
- Employee is subject to a COVID -19 quarantine or isolation order,
- Employee has been advised by healthcare provider to self-quarantine because of COVID-19,
- Employee is experiencing COVID-19 symptoms and seeking a medical diagnosis,
- Employee is caring for a family member who is subject to quarantine/isolation and/or is experiencing symptoms,
- Employee is experiencing substantially similar conditions as COVID-19.
Use of leave ordering rules – Important – the employer cannot require the employee to use other paid leave before using emergency sick leave.
Rate of Pay for the 80 hours – Please note that you can pay your employee their regular pay rate, however for purposes of determining the credit against the payroll tax, rate of pay is capped as per below:
Reasons 1-3 above
Employee is eligible for regular rate of pay, capped at $511/day for up to 10 days. Maximum paid sick leave benefit is $5,100 per employee. (You can pay more than $511/day, but the credit against payroll tax is capped at the $511/day.)
Reasons 4-5 above
Employee is eligible for 2/3 or their regular rate of pay, capped at $200 per day for up to 10 days. Max paid leave benefit is $2,000. (You can pay more than $200/day, but the credit against payroll tax is capped at the $200/day.)
Emergency Family Medical Leave Act Expansion – Is capped at 12 weeks of job protected leave through December 31, 2020. First two weeks (10 days) of FMLA are unpaid under FMLA (they are however paid under the Emergency Paid Sick Leave.) After the first 10 days, employee is eligible for paid FMLA at 2/3 of their regular pay capped at $200/day up to 10 weeks. FMLA is available to employees who are unable to work (or telework) because they are caring for a child under age 18 because the child’s school or place of childcare has been closed due to COVID-19.
Use of leave ordering rules – Important- the employee is not paid by the employer under FMLA for the first 10 days of leave. They qualify for the emergency paid sick leave at the 2/3 or $200 per day pay rule, or they may choose to use their employer sponsored PTO. (One would likely choose the latter if they are paid at a higher rate under the employer PTO plan).
Rate of Pay for the 10-week period – Employee is eligible for 2/3 or their regular rate of pay, capped at $200 per day for up to 10 weeks. Max paid leave benefit is $10,000. (You can pay more than $200/day, but the credit against payroll tax is capped at the $200/day.
If the business pays mandatory sick/FFCRA leave under the Families First Coronavirus Response Act these wages cannot count towards both FFCRA and ERC credit. These wages cannot be considered for PPP loan forgiveness.
Tracking the paid time off (or unpaid time off) – Tracking the reason why someone cannot work is key to determine your qualifying credit.
As you close your second calendar quarter of 2020, if you answer “YES” to any of the following questions, you may be eligible for a tax credit and should advise your third-party payroll company and/or tax advisors accordingly.
- Was your business ordered to shut down by the government?
- Were your gross receipts for the quarter ended June 30, 2020 below 50% of your gross receipts for the quarter ended June 30, 2019?
- Did you pay any employee for sick time or other PTO because they had COVID-19, they were caring for someone with COVID-19, they had to self-quarantine or had symptoms of COVID-19?
- Did you pay an employee who could not work or telework because they had to care for their child under the age of 18 because the child’s school or daycare provider was closed?
Mercadien’s Tax Services Group can help provide clarity on payroll and other tax matters during these unprecendented times. If you answered “Yes” to any of the above questions and want to know what your next steps should be, or if you have any questions and would like to discuss further, please contact me at firstname.lastname@example.org or 609-689-2381.
DISCLAIMER: This advisory resource is for general information purposes only. It does not constitute business or tax advice, and may not be used and relied upon as a substitute for business or tax advice regarding a specific issue or problem. Advice should be obtained from a qualified accountant, tax practitioner or attorney licensed to practice in the jurisdiction where that advice is sought.