Included in the COVID Relief stimulus package signed into law on December 27, 2020 were significant changes to certain payroll tax credits. Enhancements under the Relief Act, especially to the Employee Retention Credit (ERC), are targeted to those businesses that have experienced declines in revenue or have been “shut down” due to state and local lockdown orders.
Here is some background on the ERC
Under the CARES Act, the ERC was a refundable tax credit against payroll taxes equal to 50 percent of the qualified wages an eligible employer paid to employees after March 12, 2020 and before January 1, 2021. Companies that took out PPP loans could not participate in this program originally, so the employer benefit was severely limited. However, under the NEW stimulus bill, changes to the ERC rules now allow companies that had PPP loans to claim this payroll tax credit.
ACTION IDEA #1: Companies can “fix” their 2020 payroll tax reporting to capture these new law changes by reporting the qualified wages and health insurance costs on the fourth quarter Form 941 (i.e., rather than amending previous quarters). We advise that you not rush to file your 4th Quarter Form 941 until you have reviewed these new rules and have completed an analysis to see if you will qualify for any missed payroll tax credits. Bottom line – an employer may pay less in Q4 payroll taxes or have an opportunity to get refunds.
ACTION IDEA #2: Going Forward, employers will need to track qualified wages and health insurance costs for 2021 payroll so they can claim the ERC tax credits timely on Q1 and Q2. If they use an outsourced payroll provider, make sure they are made aware and are tracking all qualified wages as incurred.
Old Law vs New Law
Let us dig into some comparisons between the “original” ERC and the modifications made to the “new and improved” ERC.
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There is still some additional guidance needed for the ERC. Stay tuned as the IRS will certainly implement additional procedures for the ERC.
Changes to Family First Coronavirus Response Act – Sick Leave and Medical Leave
The Family First Coronavirus Response Act (FFCRA) has been expanded until March 31, 2021 for employer payroll tax credits for emergency paid sick leave and emergency family medical leave expansion. There are no changes to qualifications or credit amounts. Simply the expansion allows employers to allow these benefits and still receive tax credits through the first quarter of 2021, but it is not mandatory.
View our previously recorded webinar where we discussed the ERC and answered some questions you may have. This is a significant opportunity for businesses to help recoup employee costs while they have declines in revenue. Further guidance is likely to be issued in the coming weeks and months for claiming these credits.