While the amount of business relief loans that will be deployed for small business owners is massive—it’s both a record sum nationally and internationally—many business owners will not be able to receive those loans (for a myriad of reasons).
If that’s your case, don’t worry, you can still get assistance through the following small business tax provisions.
Employee Retention Credit for Employers Subject to Closure or Experiencing Economic Hardship
This tax provision provides a refundable payroll tax credit for 50% of wages paid to each employee during the COVID-19 crisis to encourage employers to keep paying employees. The refundable tax credit applies to wages paid to employees from March 12, 2020, to January 1, 2021.
To be considered, employers are categorized into two areas of qualification.
- This tax provision is available to employers of non-profit organizations and operations suspended totally or partially due to quarantine or a government order during a calendar quarter.
- Likewise, employers qualify for the tax provision when their gross receipts in the first quarter in 2020 fall below 50% of the comparable quarter in 2019. When receipts are more than 80% in 2020 of a comparable quarter in 2019, an employer would not qualify at the end of that quarter.
Please note: Federal, State, and local governments and small businesses with loans under the Paycheck Protection Program do not qualify.
Furloughed employees or who suffer reduced hours are eligible too.
If you are a business owner with 100 or fewer full-time employees, all the wages are eligible.
The tax credit is 50% of up to $10,000 paid to each employee for wages, health benefits, and compensation. Therefore, the maximum credit for each employee is limited to $5,000, cumulative for all calendar quarters.
Required paid sick leave or required paid family leave are not included in the wages, neither employer credit for paid family and medical leave (IRC sec. 45S).
Claiming the Credit
Beginning with the second quarter of 2020 and using Form 941 (for most employers), business owners report total qualified wages and health insurance costs for each quarter on their quarterly employment tax returns. If your federal employment tax deposits are more than the credit, you can reduce your deposit by the amount of the credit.
If your federal employment taxes do not cover the amount of the credit after deferring employer social security tax deposits under the CARES Act, you can submit Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request an advance payment of the credit.
In addition to keeping records supporting the claim, the IRS recommends that employers should keep employment tax records for a minimum of four years.
Delay of Payment of Employer Payroll Taxes
This tax provision lets you defer the payment of the employer’s share of certain payroll taxes until the end of 2020. The deferral covers the employer’s share of deposits and payments due for the period between March 27, 2020 to December 31, 2020.
This means that payments are deferred in two installments, 50% of the amount deferred and deposited on December 31, 2021 and the remainder deposited on December 31, 2022. What payroll taxes can be deferred?
- the employer part of FICA taxes
- the Railroad Retirement taxes
- half of the SECA tax liability
If you are part of the PPP program, you cannot apply for a deferral.
Sick Leave Credit and Family Leave Credit
Additionally, businesses can receive a credit when paying employees unable to work (including working remotely) due to a Coronavirus quarantine or self-quarantine or when caring for a family member.
Employers can reduce their deposits of payroll taxes withheld from employees’ wages by the amount of the credit. Depending on the circumstances, employers may receive a credit for paying employees up to 10 days, two weeks, or 10 weeks for sick and/or family leaves.
The credit includes sick leave/family wages, related health plan expenses, and the employer’s share of Medicare tax for the period April 1, 2020, to December 31, 2020.
The bottom line
We’re living in an unprecedented situation, but there are ways to help your business weather the storm.
If you can apply for PPP or EIDL, we recommend that you do so. If, for any reason, you can’t, remember that we are here to help you.
Read more articles and find additional valuable resources to help you during this crisis: