2020 was a difficult year—to say the least. The COVID-19 pandemic shuttered many small businesses and put many more in danger. A new bill was passed at the end of December 2020 called the Consolidated Appropriations Act, 2021 that included a $900 billion COVID-19 relief package that extended many of the initiatives started by the CARES Act, making enhancements, adding clarification, and introducing new initiatives.
Wondering how these relief efforts may affect your taxes? Read on to find out.
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How will getting a PPP loan affect my federal taxes?
Under the new bill, the Paycheck Protection Program (PPP) was extended, eligibility and forgiveness guidelines were expanded, and second draws have been allowed. Importantly, the government made some important clarifications on PPP taxability:
- A PPP loan is not considered gross income and therefore, is not taxable.
- Any forgivable expenses are tax deductible.
Your big takeaway: This is a pretty big deal, so be sure to spend those loan proceeds according to the guidelines to ensure they are both forgivable and deductible.
How will getting a PPP loan affect my state taxes?
While there is a chance your state will follow the example of the federal government and exclude the forgiven loan amount from taxable income—there’s also a chance your state will do the opposite.
In order to get a clearer picture of how your state will likely proceed, you need to understand whether your state conforms to the federal tax code. For the purpose of simplicity, many states conform to federal tax guidelines, while others do not. Take a look at this map to understand whether your state conforms.
If your state has rolling conformity or no individual income tax, you can probably expect that the forgiven amount of your PPP loan will not be taxed by the state, but in other cases, the state legislature must enact legislation to allow favorable tax treatment.
Your big takeaway: Understand whether your state conforms to federal tax code, and stay up-to-date on new legislation or developments in your state around taxing the PPP.
How will getting an EIDL affect my taxes?
The SBA offers a relief option called the Economic Injury Disaster Loan (EIDL) to help struggling businesses. Under the new bill, funds for EIDL have been replenished; $20 billion has been allocated to re-establish the EIDL advance grant program (which provides $10,000 grants to recipients who do not need to pay them back) and to target small businesses in low-income areas to provide them with the EIDL grants and loans.
There are two parts an EIDL:
- The $10,000 advance grant (that does not need to be repaid)
- The actual loan (that does need to be repaid)
Some recipients will receive both the grant and the loan, while some may receive one but not the other.
Under the new bill, EIDL grants are not considered gross income and therefore, not taxable.
Also, a new clarification was made in the bill: a borrower who has received an EIDL grant and also received a PPP loan will no longer need to deduct the EIDL grant amount from the forgivable loan amount.
The EIDL loan, however, remains taxable.
Your big takeaway: The loan will be taxed; the grant won’t be.
How will getting an SBA 7(a), 504, or Microloan affect my taxes?
The SBA offers a number of small business loan options (including PPP and EIDL), but the lesser known loans are:
The new bill has extended a program in which principal and interest payments—as well as any fees associated with the loans—will be covered for at least six months. The bill has also eliminated certain loan limitations, increased the percentage of the loans that will be guaranteed by the SBA, and waived fees entirely for some loans.
However, all of these loans will be considered gross income and will be taxed.
Your big takeaway: Depending on the specifics of the loan, this may be a good deal, but keep in mind: come tax season, you’ll need to include these loans on your tax return.
My employees are now remote—how will this affect my taxes?
If your employees are working remotely within the same state where your business is registered, your taxes will not be affected. However, if your employee has moved out of state, there may be tax implications across corporate taxes, sales taxes, income taxes and payroll taxes.
Due to the COVID-19 pandemic, many states have issued temporary guidance for employers of out-of-state employees. Find a state-by-state guide to payroll and income tax withholdings here.
I receive(d) unemployment benefits—how will this affect my taxes?
A number of unemployment benefits and programs for employees and self-employed people have been released as a result of COVID-19, and the new bill has reinstated certain programs. Among these are:
- State-level unemployment insurance
- Pandemic Unemployment Assistance (PUA)
- Federal Pandemic Unemployment Compensation (FPUC)
- Pandemic Emergency Unemployment Compensation (PEUC)
State-Level Unemployment Insurance
This is considered taxable income and either you can have taxes withheld from your weekly checks or you can elect to wait until year-end tax filing. Learn more about COVID-19 unemployment benefits in this state-by-state guide.
This assistance has been provided to those who are self-employed along with 1099 contractors in the form of support ranging from $205 to $648 per week. The program runs for 50 weeks and will expire on April 5,2021.
Eligible PUA recipients will include:
- Those seeking part-time work
- Those who may not have the work history to qualify for state unemployment insurance (SUI), or may not qualify for another reason
- Those who may not qualify for federal unemployment assistance
In order to be eligible for PUA, proof must be provided that the applicant is available and able to work—and that the applicant is unemployed or partially employed as a direct result of the COVID-19 pandemic.
It should be noted that eligibility for PUA also allows you to access the Federal Pandemic Unemployment Compensation (FPUC) program benefits.
PUA is considered taxable income (along with any state benefits you may be getting), so if you have been receiving this, be sure to include it in your tax return.
Under the new bill the FPUC program will continue to provide direct payments of an additional $300 on top of regular unemployment compensation. A recipient is eligible to receive FPUC as long as they are eligible to receive unemployment benefits—or until the program expires on March 14, 2021, whichever is earlier.
This benefit is available to both employees and the self-employed.
FPUC is considered taxable, and just as in the case of state-level unemployment insurance, you can make a selection to either have the taxes withheld from your checks or wait until year-end.
PEUC is a provision in the CARES Act that allows states to extend unemployment benefits by 29 weeks and expires on April 5, 2021. Employers are not charged for PEUC benefits paid out to employees which is a crucial measure designed to give employers who may be stretched thin by payroll costs some much-needed relief.
PEUC is also available for the self-employed.
PEUC is considered taxable income, and in many states, you can elect to have applicable state tax withheld from your paychecks or wait to report this as income with your tax filings.
Your big takeaway: Unemployment compensation is taxable. You will likely be able to elect whether those taxes are withheld from your paycheck or pay them at year end.
I’m an employer who laid off employees—how will this affect my taxes?
It depends on your state. Typically, when an organization terminates an employee and that person collects unemployment insurance, the company’s tax rate will increase (although that increase will not happen within the termination year; rather, increases are seen in later years).
However, due to the unusual nature of the COVID-19 pandemic, many states have stepped in to say they will not be raising rates based on terminations made during the pandemic. Get a state by state guide on SUTA tax rates during COVID-19 here.
Your big takeaway: Depending on where you live, your taxes may be affected.
What’s the payroll tax deferral and how will it affect my taxes?
This one is a doozy, so pay close attention. But first, a little refresher on payroll taxes: these are taxes paid on wages or salaries that employees earn—they are paid by both employers and employees. Payroll taxes include Social Security and Medicare.
Employer payroll tax deferral
Under the CARES Act, self-employed people and employers were given the option to defer Social Security payroll taxes through December 31, 2020. 50 percent of the deferred amount will be due on December 31, 2021 and the remaining 50 percent will be owed on December 31, 2022.
Under the new bill, nothing has changed; the employer payroll tax deferral has expired and the deadlines for repayment remain the same.
Employee payroll tax deferral
On August 8, 2020, the president signed an executive memo enabling the deferral of employee payroll taxes. This allowed employers to temporarily offer employees larger paychecks by simply not withdrawing employee Social Security taxes from September 1, 2020 – December 31, 2020. However, these taxes will have to be paid back eventually, which means that at some point, employers will have to withhold even more from employee paychecks to make up the deferred amount.
That program has now expired, but under the new bill the timeframe for the repayment of the deferred Social Security taxes has been extended, giving folks until December 31, 2021 to pay the government back. Penalties and interest on any unpaid deferred taxes will start to accrue on January 1, 2022.
Your big takeaway: If you or your employees took advantage of the payroll tax deferral program, start making those larger withdrawals to pay the government back.
What are COVID-19 Tax Credits and What Do I Need to Know?
A number of tax credits have been made available by the government to offer relief to businesses during the COVID-19 pandemic.
Employee Retention Credit
Made available to employers, the IRS released the Employee Retention Credit (ERC) as part of the CARES Act; this provides a refundable tax credit to businesses.
Under the new bill the credit amount has been increased; as an incentive to keep employees on payroll.
Employers of COVID-19 pandemic affected businesses may:
- Receive a credit of up to 70 percent of each employees qualified wages (up from 50 percent, which was what was offered in the CARES Act)
- Offset qualified wages up to $10,000 per employee per quarter (up from $10,000 per year)
- Allow group health plan expenses to be considered qualified wages, even when no other wages are paid to an employee
There are certain eligibility requirements, so be sure to read the COVID-19 tax credit post to get all the details.
Paid Leave Tax Credits
The Families First Coronavirus Response Act (FFCRA) was signed in March and expired at the end of 2020; however, certain provisions were extended by the Consolidated Appropriations Act, 2021. Tax credits for employers who offer paid leave were among the extended provisions.
Here’s a little refresher; the FFCRA instituted these Acts:
- The Emergency Paid Sick Leave Act (EPSLA)
- The Emergency Paid Sick Leave Act (EPSLA) dictates that employees are entitled to up to 80 hours of fully paid sick leave if they are absent from work because they are sick with COVID-19; however, they are entitled to only two-thirds of their regular pay rate if they are absent because they caring for a family member with COVID-19 or a child who is home due to school closures.
- The Emergency Family and Medical Leave Expansion Act (Expanded FMLA)
- Eligible employees have up to 12 weeks of leave to use between April 1, 2020 and December 31, 2020; this time is included in (not in addition to) the total FMLA leave entitlement.
Both of these programs have been extended through March 31, 2021, but employers not longer have to offer this leave; however, if they choose to offer the leave, they may take advantage of the tax credits.
Self employed? You can choose to use your average daily self-employment income from 2019 rather than 2020 to compute the tax credits associated with expanded leave. These tax credits offset the federal self-employment tax in an amount equal to their qualified sick leave amount, or qualified family leave equivalent amount.
Your big takeaway: Tax credits are complicated! Be sure to understand leave eligibility requirements and how to get reimbursed for leave paid with a tax credit.
For more information on navigating your small business needs throughout the COVID-19 pandemic, visit the Gusto COVID-19 Small Business Resource Hub. We got you.