There are various strategies to assist your business with recovering from the COVID-19 pandemic, such as Employee Retention Credit (ERC), Leave Credits and Payroll Tax Deferral.
Two COVID-19 aid packages recently became law, enabling employers to offset payroll taxes through credits and deferrals. In this article we’ll look at these benefits, their application processes and eligibility requirements.
Employee Retention Credit (ERC)
Although PPP loans have become the go-to solution for payroll tax relief during COVID-19 pandemic, another program that may prove equally valuable: Employee Retention Credit (ERC). This refundable credit helps qualifying companies reduce employment taxes and ease COVID compliance burdens; however, its nuances and qualifications can be complex to understand; companies should consult accountants or payroll specialists in order to establish eligibility, calculate an accurate amount, and file for it successfully.
ERC was first created under the CARES Act and implemented in March of 2020 as an employer-based refundable tax credit, offering eligible companies up to 70% reduction of employment taxes paid during quarters when employees had to work for their employers because of COVID-19 pandemic. Credits are limited to $26,000 per full-time employee and designed specifically for smaller businesses (defined as having 100 or fewer full-time monthly employees in 2019).
Notably, ERC is not a loan and does not need to be paid back; however, if incorrectly claimed or filed in error by companies, the IRS can require that companies repay both the credit amount plus potential penalties. To facilitate accurate calculations and claim filing processes for ERC credits responsibly, the IRS has developed an informative question-and-answer tool.
Though the ERC was retroactively repealed by the IIJA as of Sept 30 2021, there is still time to claim your refund using Form 941-X. This form enables eligible companies to adjust their quarterly federal employment tax returns and claim any unused ERC credits from 2020 calendar year (first three quarters or first two quarters in 2021), or eligible recovery startup businesses can claim credits through Dec 31st of 2021 (fourth quarter 2021 only for recovery startup businesses). Determining an ERC refund requires reviewing records, mandated closures, and how they may have affected workforce numbers within their organization – something not all companies possess or readily.
Paid Sick and Family Leave Credit (PSLFC)
Payroll tax deferral is one of the most frequently used forms of payroll tax relief; however, not all payroll taxes qualify. Some taxes eligible for deferral include employer withholding tax payments, employee Medicare and Social Security contributions as well as federal unemployment insurance payments; however it should be noted that IRS rules require employers to report these withheld amounts on employees’ tax returns.
Coronavirus pandemic has presented businesses with several additional challenges, including increased workplace absences and diminished productivity. To ease some of this stress, Congress has provided several COVID-19 payroll tax relief programs: Employee Retention Credit (ERC) and Paid Sick and Family Leave Credit (PSLFC). Both programs allow employers to claim credits against payroll costs or, in certain instances, deferral of withholding and deposit of payroll taxes on qualifying wages.
ERC provides small and midsize businesses (known as “Eligible Employers”) a tax credit for wages paid to employees absent due to COVID-19 pandemic. This credit corresponds to employer withholding taxes that would otherwise have been deposited into government trust fund account; eligible employers can claim up to $7,000 per employee in total per quarter for eligible claims.
PSLFC was created to assist employers in providing paid sick and family leave during the COVID-19 pandemic. Unlike the ERC, which only applies to small and midsize businesses, this payroll tax credit may be utilized by all employers – specifically wages paid for the purpose of meeting personal health needs as well as those of children, spouses, domestic partners or siblings of an employee enrolled as eligible employers between April 1-20 September 30, 2021. Employers eligible to claim this PSLFC may claim up to two weeks paid sick/family leave during this period from April 1- September 30, 2021.
An Eligible Employer can determine eligibility of leave wages for the PSLFC by comparing them against its scheduled federal employment tax deposits. If credits exceed these deposits, any excess can be deferred until their next quarterly deposit. Alternatively, any difference can be claimed as an advance refund by filing Form 941 in future quarters.
Employer Incentives to Defend Against Disruption (EIDL)
At the height of COVID-19’s pandemic, the IRS implemented several payroll tax relief programs designed to encourage employers to retain employees on the job, such as Employee Retention Credit (ERC), Paid Sick and Family Leave Credit (PSLFC) and Targeted EIDL Advance grants. As per Consolidated Appropriations Act 2021 provisions, these programs were extended through December 31, 2021 or until funds run out.
Step one in taking advantage of payroll tax relief programs is determining eligibility, which may prove a daunting challenge given their differing requirements and timelines. Eligibility requirements often necessitate reviewing various government orders or gathering financial data for compilation into various financial databases, while some programs also contain aggregation rules which must take multiple business units within an organization into consideration.
Once an employer has determined they qualify, it can utilize payroll tax credits in various ways. For instance, the ERC offers a dollar-for-dollar credit against federal employment taxes up to $10,000 per qualified employee; and any excess credit is returned directly back to them as refund.
In addition, the CARES Act permits employers to defer payment of social security taxes (but not Medicare taxes) due under Section 2302 until December 31, 2020. This deferral applies regardless of employer size and is available even to tax-exempt entities. Those looking to take advantage of this program must file amended Form 941s each quarter reflecting this deferral; third-party payroll providers often help this step along by reducing future federal employment tax deposits accordingly.
PPP Forgiveness
At a House oversight hearing on the government’s COVID-19 response in July 2020, Secretary Mnuchin admitted that certain well-resourced businesses were misusing the PPP loan program for personal purposes. He pointed out that Congress made loan forgiveness rules too liberal, leaving little capacity for Small Business Administration to monitor bad actors.
The CARES Act established the Payroll Provider Loan Forgiveness Program to aid employers and mitigate its financial impact during a pandemic. Businesses eligible for PPP must fulfill several requirements, with at least one being proof that income has been lost as a result of COVID-19 crisis – such as declining gross receipts – documented; additional requirements include at least two consecutive months’ earnings loss as well as 20% decrease in number of FTE employed.
If your business fulfills all requirements for PPP loan forgiveness, up to $50,000 could be available under the CARES Act as income-free forgiveness of PPP loans. In general, loan forgiveness proceeds are taxed as discharge of debt income; however, under this program PPP loan proceeds are excluded from income – making PPP loan forgiveness an attractive choice for companies that need wages replaced in order to retain employees or cover business expenses.
To be eligible for PPP forgiveness, you must track all payroll-related expenses and record how you used from your PPP funds. Gusto or your accounting software can help keep track of this activity; Gusto customers can even use our PPP Forgiveness Reporting Tool within their dashboard to see just how much has been spent on payroll! Ensure your payroll counts are accurate including FTE counts – be sure to regularly verify this calculation during each Covered Period or Alternative Payroll Covered Period to make sure this occurs correctly!
Note that both ERC and PPP cannot be claimed at once for wages that meet both programs’ criteria. If your wages qualify under both programs, choose either ERC or PPP according to state tax laws before filing either one of your claims.