Tips from the Tax Man: A Reminder to Employers About the New Tax Credits Available

Pullman & Comley - Labor, Employment and Employee Benefits Law

The Internal Revenue Service (“IRS”) recently released guidance reminding employers about three new refundable tax credits that may be available to businesses impacted by COVID-19. In light of the economic uncertainty generated by the pandemic, many employers were forced to make difficult decisions to lay off or furlough employees. As businesses across the country prepare to reopen, these tax credits can provide employers with valuable resources to maximize their budgets and bring employees back to work quickly.

In preparing to reopen, employers should refamiliarize themselves with the Families First Coronavirus Response Act (“FFCRA”) and the Coronavirus Aid, Relief, and Economic Security Act (“CARES”), as much of the guidance has changed in the last few weeks. Under the FFCRA, employees who are unable to work due to certain COVID-19-related qualifying events may be entitled to up to 80 hours of Emergency Paid Sick Leave (“EPSL”), and those who must care for a child whose school or day care has closed due to COVID-19 may be entitled to up to 10 weeks of paid Family and Medical Leave (“Expanded FMLA”). While this may sound like an expensive proposition for employers, who ordinarily would be responsible for footing the bill for this leave, two of the newly available tax credits may reduce or eliminate the added financial burden.

Covered employers who must provide paid leave under the EPSL or Expanded FMLA provisions of the FFCRA are eligible to receive Paid Sick Leave Credits and Family Leave Credits to cover the costs of providing these paid leaves to employees when they are unable to work. According to the IRS, “eligible employers are entitled to immediately receive a credit in the full amount of the required sick leave and family leave, plus related health plan expenses and the employer’s share of Medicare tax on the leave, for the period of April 1, 2020, through Dec. 31, 2020.” This is accomplished by permitting employers to offset the claimed credit amounts against certain payroll taxes that have been withheld from employee wages, which also provides employers with easy access to funds that would otherwise be unavailable. There are specific documentation, reporting, and filing requirements for claiming these credits, so employers should take careful steps to ensure they are in compliance.

In addition to the tax credits available under the FFCRA, the CARES Act introduced the employee retention credit, which is available to certain employers whose operations have been affected by COVID-19. The purpose of the employee retention credit is to incentivize businesses to keep employees on the payroll, rather than implementing layoffs or furloughs.  In that sense it is similar in theory to the PPP loan program. According to the IRS, to qualify for the credit employers must meet one of two criteria:

  1. The employer’s business must be fully or partially suspended by government order due to COVID-19 during the calendar quarter; or
  2. The employer’s gross receipts must be below 50% of the comparable quarter in 2019. Once the employer’s gross receipts exceed 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

Employee retention credits are available to employers of all sizes, including tax exempt organizations, although state and local governments, their related entities, and organizations who have taken small businesses loans – including PPP loans– are excluded. If these requirements are met, an employer can receive employee retention credits equal to 50% of qualified wages (including certain health plan expenses) paid to each employee up to $10,000 between March 12, 2020 and December 31, 2020. This amounts to a per-employee maximum of $5,000, which can provide a significant windfall for employers who may be struggling to secure enough staff to reopen.

Eligible businesses should take advantage of these tax credits when possible but must ensure strict compliance with the record-keeping and other required formalities. Failure to comply with these requirements can prove costly, so employers are advised to consult counsel with any questions.  

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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