COVID-19 made 2020 a challenging year for businesses. To help small and medium companies survive, the federal government passed legislation to return money to businesses through tax credits. Companies need to file through the IRS to claim these tax credits, which end in 2021.
Let’s take a closer look at these special credits and how to claim them.
Tax credit for paid employee leave
Employers who granted paid leave for their employees to get the COVID-19 vaccine may be eligible for a tax credit. The same holds if you issued paid leave for employees recovering from COVID-19. The American Rescue Plan Act of 2021 (ARP) provides tax credits for up to 80 hours, or two weeks, of paid sick leave.
ARP reimburses up to $511 per day, per employee, for up to 100% of the employee’s regular pay rate. So employers can claim up to $5,100 for every employee they paid sick leave due to a COVID-19 illness.
Tax credits for paid family leave
The Act also provides tax credits for up to two-thirds of an employee’s regular pay rate for paid family leave. Employers can claim credit for up to 12 weeks of paid family leave. However, the act limits the amount employers can claim to $200 per day for a total of $12,000 per employee.
Tax credits for keeping employees on the payroll
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 help employers who keep their employees working. Passed in December 2020, the act specifically extends the Employee Retention Credit (ERC) through June 30, 2021.
The ERC allows employers to claim a refundable tax credit of 70% of their employees’ qualified wages.
The law limits the qualifying wage to $10,000 per employee per calendar quarter of 2021. So essentially, employers can claim up to $7,000 per employee per quarter. For all of 2021, this amounts to a $14,000 tax credit for each retained employee.
Claiming the tax credits
To claim these tax credits, employers should use Form 7200 Advance Payment of Employer Credits Due to COVID-19. They need to use this form in conjunction with Form 941, Employer’s Quarterly Federal Tax Return.
The law permits employers to deduct these COVID-related tax credits from the Social Security taxes they routinely deposit with the IRS. Companies would need to account for their reduced deposits on Form 941 and deposit all Social Security taxes above the deducted amount. Companies not doing so could result in a “failure to deposit penalty.”