Pandemic-Related Payroll and Self-Employment Tax Relief Explained

While it seems like ages ago, the Families First Coronavirus Response Act (FFRCA) was passed 10 months year ago, providing businesses incentives to retain their workforce through various tax relief measures. The Consolidations Appropriates Act passed on December 27, 2020 extended and expanded these incentives through various times in 2021. Here are a few of the relief opportunities that we think you should be aware of. 

Payroll and Self-Employment Tax Relief 

Businesses with employees (including yourself) can postpone paying the employer share of payroll taxes due between March 27, 2020 (the day the CARES Act passed) and December 31, 2020. Fifty percent of the amount postponed must be paid no later than December 31, 2021 and the rest must be paid by the end of 2022. 

For those that pay self-employment taxes, the postponement period is the same, but you must pay 50 percent of your 2020 Form 1040, 25% by the end of 2021 and the remaining 25% by the end of 2022. 

Employee Retention Credit (ERC)

Businesses are eligible for this credit if they meet one of the following requirements:

  • Your business had to stop operations – either partially or fully – due to a COVID-19 related government order during a calendar quarter.
  • Your gross receipts were less than 50% for a calendar quarter when compared to the same quarter in 2019. In this case, you can claim the credit until your gross receipts exceeded 80% of those from the same quarter in the prior year. Not-for-profit organizations should use the numbers reported on Form 990 to determine if the organization had more than a 50% reduction in gross receipts. 

If you meet one of the above requirements, the CARES Act provides a refundable tax credit against the employer portion of employment taxes equal to 50% of wages paid to employees between March 13, 2020 through the end of the year (2020). 

The maximum wage that qualifies for the credit is $10k per employee (including health benefits paid on their behalf) for all calendar quarters. What you can take depends on how many employees you have:

  • More than 100 employees: You can take the credit for wages that you paid to employees during the time they could not work due to government-ordered closure.
  • 100 or fewer employees: You can take the credit for all employee wages regardless of whether you were open for business or closed due to government order. 

Additionally, the CAA states that employers who receive PPP loans may still qualify for the employment retention credit, however payroll costs qualifying for forgiveness do not include wages taken into account in determining the amount of the credit.

ERC Changes Made in CAA for 2021

The CAA extended the ERC through June 30, 2021 and made some changes to it that apply to the credit during 2021 (January 1, 2021 – June 30, 2021). 

  • The credit percentage is now 70% of qualified wages compared to 50% in 2020. 
  • The amount of an employee’s wages (including self-employed individuals) was increased to $10k per quarter rather than $10k per year in 2020. 
  • The eligibility test threshold is now 20% reduction over the same calendar quarter in 2019 rather than 50% in 2020. 

The Families First Coronavirus Response Act (FFCRA) Tax Credits

If you are required to provide paid sick or family leave to your employees, you can receive refundable payroll tax credits against the employer portion of your employment tax liability to offset the cost of that leave. Here’s how this works:

Paid Sick Leave Payroll Tax Credit

Employers are required to pay employees for sick time if they are unable to work on site or remotely. 

If your employee meets the requirements below, you must provide up to two weeks of sick time at 100% of their pay for which you can receive a 100% payroll tax credit of up to $511 for any day that you paid the individual sick time. 

  1. They are required to quarantine due to a federal, state or local order or because a health care provider advised them to do so.
  2. They are experiencing COVID-19 symptoms and seeking a medical diagnosis. 

If your employee meets the requirements below, you must provide up to two weeks of sick time at two-thirds of their pay, and you can receive a 100% payroll tax credit for up to $200 for any day for which you pay the individual sick time. 

  • They are caring for someone who is required to quarantine or caring for their child(ren) because of a school or daycare closure. 
  • They are experiencing any other “substantially similar condition specified by the Department of Health and Human Services in consultation with the Department of the Treasury and the Department of Labor.”

The maximum number of creditable paid sick leave days is 10 per employee per calendar year and their pay calculation includes qualified health plan expenses. While it originally expired at the end of 2020, this credit was extended through March 31, 2021 by the CAA.

Self-Employed Sick Leave Tax Credit

The requirements and benefits are nearly the same if you are self-employed but would have qualified for paid sick leave if you were employed by someone else. 

  • If you were unable to work due to a situation described in numbers 1 or 2 above, your refundable tax credit is equal to the number of days you couldn’t work multiplied by the lesser of $511 or 100% of your average daily self-employment income for either 2019 or 2020. 
  • If you were unable to work due to a situation described in numbers 3 or 4 above, your refundable tax credit is equal to the number of days you were unable to work multiplied by the lesser of $200 or 67% of your average daily self-employment income for either 2019 or 2020.

You can claim the credit for 10 or fewer days per calendar year. To determine your average daily self-employment income, take your net earnings from self-employment for 2020 and divide by 260. While it originally expired at the end of 2020, this credit was extended through March 31, 2021 by the CAA.

Paid Family Leave Payroll Tax Credit

Under the Family & Medical Leave Act (FMLA) you must provide public health emergency leave to employees that are unable to work because they are caring for a child under the age of 18 because their school or daycare is closed, the childcare provider is not available, or a public health emergency has been declared. 

While you can provide unpaid leave for the first 10 days, after that period you must provide paid leave. As long as your employee receives no more than 10 weeks of paid leave at two-thirds of their normal pay (including medical benefits), you can receive a 100% payroll tax credit for those paid leave wages for up to $200 per day, not to exceed $10,000. 

Similar to the FFCRA tax credit, self-employed individuals can also qualify for the credit if they meet the qualifications above. The amount of credit is determined by multiplying the number of days you are unable to work by the lesser of $200 or 67 % of the average daily self-employment income for the year for a maximum of 50 days per calendar year. 

There are quite a few opportunities to consider here if you are an employer or self-employed, so reach out to us with questions and assistance so you can take advantage of all the benefits available to you.  

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