The Federal Government has taken many steps to help businesses weakened by the COVID-19 pandemic.  Some of their efforts are well known because stories about government loans and grants are easier to report and more interesting than the harder to understand credits built into the legislation.  This article highlights three credits, employee, paid sick leave, and family leave,  that can be used by businesses.

Employee Retention Credit:

This credit encourages businesses not to drop employees off the payroll.  As a refundable credit, it applies to the tax with the possibility of a refund higher than any taxes paid during the year.  The business can take the credit up to $10,000 for 50% of wages paid by an eligible employer who has been hurt financially by COVID-19. 

The only employers that do not qualify are government entities and small businesses who take small business loans.  The employer fall in one or two categories:

  • Their business must have been at least partially shut down by a government order in the calendar quarter.

Or

  • The employer’s gross receipts are below 50% of the comparable quarter in 2019.  The first quarter receipts go above 80% in a comparable quarter in 2019, the credit is gone.

The company calculates these measures each calendar quarter.

Paid Sick Leave Credit and Family Leave Credit:

This credit gives businesses a credit to help cover sick leave because an employee is seeking Coronavirus treatment, is in quarantine or has symptoms and is seeking medical evaluation.  The employees can receive as many as 10 days or 80 hours at their regular pay rate.  Like most IRS regulations, this one limits the employee’s pay to $511 per day.  That covers employees making up to about $63 an hour.

The credit also provides for employees who can’t work because an employee is caring for a child because day cares and schools are closed.  In this case the credit is for two weeks at 2/3 of regular pay rate.  It is limited to $200 per day.  That translates to $37.50 an hour.  2/3 of that rate is $25 per hour.

Family and medical leave is covered at the same rate with the same limitation.  The sum of all of these is $10,000 total.

The mechanics of the credit for the company is relatively straightforward. A company can be immediately reimbursed for the credit by reducing their normal deposits to the trust fund by the amount of the credit earned.

Eligible companies can immediately take the credit for expenses I have already discussed plus related health plan expenses and the company’s share of Medicare tax on leave taken.  This started April 1 and goes for the rest of the year.  The credit is applied against applicable employment taxes on wages paid.

How will employers receive the credit?

Qualified wages and related health insurance costs are reported on the quarterly tax returns starting with second quarter 2020.  Because this is refundable, if there aren’t enough tax deposits to cover the credit the IRS will pay an advance.  File Form 7200 Advance Payment of Employer Credits Due to COVID-19.

This can be very confusing.  Please contact Books, Taxes & More if you have questions or need help.  This is a great lifeline for both employees and the companies that hire them.