Three New Employer Credits Exist for Businesses Paying Their Workersby
The Coronavirus Aid, Relief and Economic Security (CARES) Act adds the last of three new tax credits that may be available to employers continuing to pay workers during this national health emergency.
Ken Berry’s previous columns discussed how the CARES Act impacted retirement fund investment, charitable giving and net operating losses. We're now looking into how CARES, TCJA and FFCRA impact employers still able to pay staff.
This week we explore what’s in the Act, and other tax laws, for business clients that are still able to pay their staff. There are three specific tax credits to be aware of, as described below.
1. Family and Medical Leave Credit
The first credit, instituted by the Tax Cuts and Jobs Act (TCJA) for 2018 and 2019, was recently extended through 2020 by the Taxpayer Certainty and Disaster Relief Act. This credit is available to employers that pay employees on family and medical leave, subject to certain conditions.
To qualify for the credit, an employer must have a written policy in place that provides at least two weeks of paid family and medical leave annually to qualified full-time employees (prorated for part-time employees) and the paid leave is at least 50 percent of the normal wages. The credit percentage ranges from 12.5 percent to 25 percent, depending on the level of pay.
For these purposes, a “family and medical leave” occurs for one or more of the following reasons:
- Birth of an employee’s child and to care for the newborn
- Placement of a child with the employee for adoption or foster care
- To care for the employee’s spouse, child or parent who has a serious health condition
- A serious health condition that makes the employee unable to perform the functions of his or her position
- Any qualifying event due to an employee’s spouse, child, or parent being on covered active duty or being called to duty in the Armed Forces
- To care for a service member who is the employee’s spouse, child, parent or next of kin
Finally, the credit is available only for wages paid to employees who have worked for the employer at least one year and are paid no more than $72,000 (indexed for inflation) in the prior year.
2. COVID-19 Leave Credit
Under the Families First Coronavirus Response Act (FFCRA), employers with fewer than 500 employees must provide emergency paid sick leave of up to $511 per day for up to 10 days, up to a total of $5,110 total, to an eligible employee in COVID-19 quarantine or seeking a coronavirus diagnosis. An employee may also receive emergency paid sick leave of up to $200 per day for a maximum of ten days, up to a total of $2,000.
This FFCRA also gives employees the right to take up to 12 weeks of family leave for a COVID-19 quarantine. The employer must pay at least two-thirds of the employee’s usual pay up to a maximum of $200 per day, up to a $10,000 total. In return, employers may claim a tax credit equal to the full cost of the emergency sick leave and family leave payments.
This new credit first offsets the Social Security tax component of payroll tax. Any excess credit is refundable and similar rules apply to self-employed individuals. However, the credit isn’t available to employers already receiving the family leave credit established by the TCJA.
3. Employer Retention Credit
Finally, the CARES Act authorizes a credit of 50 percent of the qualified wages an employer pays to employees after March 12, 2020 and before January 1, 2021. For these purposes, “qualified wages” are limited to the first $10,000 of wages paid to each worker during this time period.
An employer is eligible for the employee retention if it fully or partially suspends operations during any calendar quarter due to government orders relating to the COVID-19 outbreak OR it experiences a significant decline in gross receipts. A “significant decline” occurs when gross receipts equal less than 50 percent of the gross receipts for the same calendar quarter in 2019.
The definition of qualified wages depends on how many employees worked for the employer last year.
- If the employer averaged more than 100 full-time employees during 2019, qualified wages generally are the wages, including certain health care plan costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts.
- If the employer averaged 100 or fewer full-time employees during 2019, qualified wages are the wages, including health care plan costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not employees are providing services.
This credit can’t be claimed for the same wages for which the employer claimed either one of the two credits for paid family or sick leaves.
Pass along this important information to your business clients. They may need your assistance relating to these new credits.
Ken Berry, Esq., is a nationally known writer and editor specializing in tax, financial, and legal matters. During his long career, he has served as managing editor of a publisher of content-based marketing tools and vice president of an online continuing education company. As a freelance writer, Ken has authored thousands of articles for a...