New Employer Tax Credits for Businesses Impacted By COVID-19

The IRS Offers Tax Credits for Employee Retention, Paid Sick Leave, and Paid Family Leave

Many businesses that have been affected by the COVID-19 crisis will be eligible for two new employer tax credits:

  • The Employee Retention Credit
  • The Credit for Sick and Family Leave

These credits are intended to help encourage employers to keep employees on their payroll and provide financial assistance to employees who are unable to work due to the Coronavirus.

Employee Retention Credit

The Employee Retention Credit is designed for businesses that are experiencing economic hardship as a result of COVID-19. This is a refundable tax credit meant to help employers to keep their employees on the payroll. The credit is worth 50% of up to $10,000 in qualified wages paid by an eligible employer to an employee. It applies to wages paid from March 13, 2020 through December 31, 2020.

This tax credit is generally available to all employers (regardless of size), including tax-exempt organizations. However, there are two exceptions. The following entity types are not eligible for the Employee Retention Credit:

  • Federal, state and local governments, and their agencies or instrumentalities
  • Businesses that receive a Small Business Interruption Loan under the Paycheck Protection Program (PPP)

To claim the Employee Retention Credit, eligible employers must fall into one of the following two categories:

  1. The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
  2. The employer has a significant decline in gross receipts. (This begins with the first quarter in 2020 when an employer's gross receipts are below 50% of the same quarter in 2019.)

According to the IRS, "qualified wages paid by an eligible employer" include related qualified health plan expenses and may vary based on the average number of a business' employees in 2019.

For businesses with 100 or fewer employees – If the employer averaged 100 or fewer full-time employees in 2019, the Employee Retention Credit is based on the qualified wages paid to all employees, whether they worked or not. The employer will still receive this tax credit even if their employees worked full time and were paid for full-time work.

For businesses with more than 100 employees – If the employer averaged more than 100 full-time employees in 2019, then the Employee Retention Credit can only be claimed for qualified wages paid to employees for time they're not providing services during the calendar quarter.

Note that an employer is not allowed to use the same wages for the Employee Retention Credit and the Paid Sick Leave / Family Leave Credit.

Tax Credits for Sick and Family Leave

The "Paid Sick Leave Credit" and the "Paid Family Leave Credit" are available to eligible employers who pay qualified sick leave wages and/or qualified family leave wages between April 1, 2020 and December 31, 2020. To be eligible, the employer must have fewer than 500 employees.

Paid Sick Leave Credit

A qualified employee is entitled to paid sick leave for up to 10 days (up to 80 hours) at their regular rate of pay, or up to $511 per day if their regular salary is higher than the applicable Federal/State/local minimum wage (but no more than $5,110 total). To qualify, the employee must not be able to work due to one of the following reasons:

  • They're subject to a COVID-19 quarantine or isolation order
  • They're advised to self-quarantine because of COVID-19
  • They have COVID-19 symptoms and are seeking a medical diagnosis

An employee who cannot work because they are caring for someone else is entitled to paid sick leave for up to 2 weeks (up to 80 hours) at two-thirds of their regular rate of pay, or up to $200 per day if their regular salary is higher than the applicable Federal/State/local minimum wage (but no more than $2,000 total). To qualify, the employee must not be able to work due to one of the following reasons:

  • Caring for someone who is subject to a COVID-19 quarantine or isolation order, or for someone who is advised to self-quarantine because of COVID-19
  • Caring for a child whose school or place of care is closed due to COVID-19
  • Caring for a child whose child care provider is unavailable due to COVID-19

Paid Family Leave Credit

An employee who's unable to work because they're caring for a child whose school/daycare is closed due to COVID-19, or they're caring for a child whose child care provider is unavailable due to COVID-19, is also entitled to paid family and medical leave. This tax credit is equal to two-thirds of the employee's regular rate of pay, up to $200 per day (or $10,000 in total).

Up to 10 weeks of qualifying leave can be counted toward the Family Leave Credit. This can also be combined with the sick leave credit (above), which means that an employer could be eligible for a credit for pay for up to 12 weeks – 2 weeks of sick leave plus 10 weeks of family leave.

The employer is also eligible for tax credits for qualified health plan expenses for the employee as well as the employer's portion of Medicare tax expenses related to the qualified wages.

For more information, see New Employer Tax Credits.