The American Rescue Plan extends a number of critical tax benefits, particularly the Employee Retention Credit and Paid Leave Credit, to small businesses.
Employee Retention Credit
The American Rescue Plan extends the availability of the Employee Retention Credit for small businesses through December 2021 and allows businesses to offset their current payroll tax liabilities by up to $7,000 per employee per quarter. This credit of up to $28,000 per employee for 2021 is available to small businesses who have seen their revenues decline, or even been temporarily shuttered, due to COVID.
For 2020, the ERC is a tax credit against certain payroll taxes, including an employer’s share of social security taxes for wages paid between March 12, 2020 and December 31, 2020. The tax credit is 50% of the wages paid up to $10,000 per employee, capped at $5,000 per employee. If the amount of the tax credit for an employer is more than the amount of the employer’s share of social security tax owed, the excess is refunded – paid – directly to the employer.
If your business is eligible for the ERC for 2020 and you have not yet claimed the credit, you can file amended payroll tax forms to claim the credit and receive your tax refund.
Businesses that took out PPP loans in 2020 can still go back and claim the ERC, but they cannot use the same wages to apply for forgiveness of PPP loans and to count toward the ERC. If your business had payroll costs that were more than the amount covered by your PPP loan, you may be able to claim tax credits for those additional payroll costs.
The ERC is now available for all four quarters of 2021. The amount of the maximum tax credit has been increased to $7,000 per employee per quarter, and the level of qualifying business disruption has been reduced so that a 20% decline in gross receipts during a single quarter will make a business eligible, for a maximum benefit of $28,000 for the full year.
Paid Leave Credit
The American Rescue Plan extends through September 2021 the availability of Paid Leave Credits for small and midsize businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving. Businesses can take dollar-for-dollar tax credits equal to wages of up to $5,000 if they offer paid leave to employees who are sick or quarantining.
Beginning in early 2020 as part of the CARES Act, businesses with fewer than 500 employees were required to provide paid sick leave and paid family leave to employees who were dealing with certain consequences of the ongoing pandemic. Under the law, businesses are entitled to a tax credit equal to 100% of the paid sick leave and paid family leave provided to employees.
The 2020 sick leave rules required businesses to provide up to 80 hours of paid leave at either:
- the employee’s regular wage, capped at $511/day up to a total of $5,110, if the employee was sick or quarantining; or
- two-thirds the employee’s regular wage, capped at $200/day up to a total of $2,000, if the employee was taking time to care for someone else who was quarantining or a child whose school or child care was closed due to COVID.
The 2020 family leave rules required businesses to provide up to ten additional weeks of leave for employees who are unable to work because they need to care for children whose school or normal child care is not available due to COVID. Those employees are entitled to two-thirds of their regular wages, capped at $200/day up to a total of $10,000.
Businesses that paid employees under these programs during the period from April 1, 2020 through December 31, 2020 can take the tax credit against their payroll taxes. If the amount of the credit exceeds a business’s portion of its employment taxes, then the excess is refunded – paid – directly back to the business.
If your business provided paid leave to employees in 2020 and you have not yet claimed the credit, you can file amended payroll tax forms to claim the credit and receive your tax refund.
Although the law no longer requires businesses with 500 or fewer employees to offer paid leave as part of the continuing COVID-relief efforts, if a business does provide paid leave to its employees then it can claim these dollar-for-dollar tax credits for wages paid through September 30, 2021. These credits can be claimed against payroll taxes on a quarterly basis.