COVID-19 has had a significant impact on small businesses across the country, and in order to provide financial relief and help small businesses continue to operate, the federal government has stepped in with legislation. To date, four major bills have been passed that include financial relief resources for small businesses.
These bills include either the establishment of new tax credits or expansions of/extensions to existing tax credits. With all the changing rules and regulations, it’s important to understand where each of these tax credits stands today so you can take advantage of them for your business. Let’s dive in.
COVID-19 Relief Tax Credits At-a-Glance
| Tax credit | Who is eligible? | What you need to know |
| Employee Retention Credit (ERC) |
| ERC offers employers a break on the cost of keeping people employed during uncertain times for their business. Understand everything you need to know about ERC in this comprehensive guide. |
| Tax Credits for Emergency Paid Sick Leave (EPSL) |
| While employers are no longer required to provide EPSL to employees who are absent due to pandemic-related reasons, those who choose to will receive tax credits. Read about tax credits for Emergency Paid sick Leave here. |
| Tax Credits for Expanded Family Medical Leave (EFMLA) |
| While employers are no longer required to provide EPSL to employees who are absent due to pandemic-related reasons, those who choose to will receive tax credits. |
| Tax Credits for COVID-19 Vaccines |
| Employers who choose to offer paid time off for COVID-19 vaccination will receive tax credits. Read all about COVID vaccine tax credits here |
| Work Opportunity Tax Credit (WOTC) |
| Recently extended through 2025, the WOTC offers tax credits to employers who hire employees from certain groups. You can learn all about it in the Employer’s Guide to the WOTC. |
| Child Tax Credit (CTC) | Anyone with one or more dependents under the age of 18. (This is not an employer-specific tax credit; anyone with kids can take advantage of it) | This is a dollar-for-dollar fully refundable credit. For 2021, those with children under the age of 6 will get $3,600 per child and those with children under the age of 18 will get $3,000 per child. Read all about the CTC here. |
| Child and Dependent Care Credit | Anyone who has lived with and cared for a dependent who is unable to take care of themselves. | This tax credit helps to offset the costs of childcare or paid care for a dependent. Read all about the Child Care Tax Credit here |
Employee Retention Tax Credit (ERC) modifications
The Employee Retention Tax Credit (ERC) was established in the CARES Act and was extended and expanded in subsequent legislation. Here is where it stands now:
Through June 30, 2021, the credit will:
- Be available to offset 70 percent of each employee’s qualified wages.
- 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.
This means that the maximum amount of ERC available per employee is $14,000 ([$10,000 for Q1 + $10,000 for Q2] x 70%).
Updates to eligibility
Eligibility updates, effective January 1, 2021:
- Your company must have had a decline in gross receipts or more than 20 percent (down from 50 percent). You can also now use prior quarter gross receipts to prove a decline (instead of receipts from the same quarter last year).
- “Qualified wages” for employers with 500 or fewer full-time employees include all wages paid to employees during those quarters (up from 100 full-time employees).
- “Qualified wages” for employers with more than 500 full-time employees is defined as: wages paid to employees for the time they are not providing services during a quarter where the business operations are fully or partially suspended due to COVID-19 circumstances (up from 100 full-time employees).
- New rules have been created which allow new employers (started in 2019 or later) to be able to claim the credit.
Retroactive updates to eligibility:
- If you received a Paycheck Protection Program loan from the first round, you may still qualify for the ERC with respect to wages that are not paid for with PPP proceeds.
For more information on ERC, see this comprehensive guide.
Updates to Emergency Paid Sick Leave (EPSL) and Emergency Family and Medical Leave (EPFL)
First introduced in the Families First Coronavirus Response Act (FFCRA), these offer refundable tax credits to employers in order to offset the cost of both of these leave types through September 20, 2021.
A quick refresher on these programs:
- Emergency Paid Sick Leave (EPSL) dictates that employers can choose to provide up to 80 hours of fully paid sick leave to employees who are absent from work due to reasons related to COVID-19. Ten additional weeks of leave may be granted, covered at 75% of their wage rate.
- Emergency Paid Family Leave gives eligible employees up to 12 weeks of leave included in the total EPFL leave entitlement (not in addition to it).
In order for employees to qualify for leave under these two programs, leave must be requested due to the following reasons:
- The employee is subject to a quarantine order
- The employee has been advised to quarantine by a healthcare professional
- The employee is experiencing COVID-19 symptoms and is seeking a diagnosis
- The employee is caring for someone who is subject to a quarantine order or has been advised to quarantine by a healthcare professional
- The employee must care for a child whose regular childcare is unavailable due to COVID-19
Expanded for self-employed individuals
In addition to the above leave expansions, individuals can elect to use their 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. This provision is effective as if it was included in the FFCRA originally. The IRS has answered FAQs specific to self-employed individuals, so if you have more questions, visit the IRS FAQ.
If you need more information on EPSLA or Expanded FMLA or the associated tax credits, the IRS has a dedicated FAQ to tax credits required by these new paid leave types.
Updates to the Work Opportunity Tax Credit (WOTC)
The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers who hire individuals from certain groups. The credit was created in 1996 to incentivize employers to expand their applicant pools and hire people who’ve historically had a challenging time finding work; the tax credit was recently extended through December 31, 2025.
As a business owner, the WOTC is a great opportunity to diversify your hires, save money on taxes, and help job candidates who’ve struggled during the coronavirus pandemic.
Get all the details on the WOTC here.
Updates to the Child Tax Credit (CTC)
This is a dollar-for-dollar refundable tax credit for parents. For tax year 2021, the Child Tax Credit (CTC) has been increased to:
- $3,600 per child under the age of 6, and
- $3,000 per child ages 6 up until the age of 18
Those eligible for CTC will be able to access these benefits earlier than in a typical year: the IRS will make monthly payments from July 2021 through December 2021 that will amount to half of the CTC, and the remaining half will be distributed in spring of 2022 (when claimed on the 2021 tax return).
Updates to the Child and Dependent Care Credit
This is a dollar-for-dollar refundable tax credit for those who pay for childcare (for children under the age of 13) or dependent care (any dependent who lives with you for at least half of the 2021 year). Eligible individuals may claim a credit for up to 50 percent of the amount you’ve paid for care in the 2021 tax year.
The tax credit maximum amount has been increased from $3,000 to $8,000 for one qualifying individual and from $6,000 to $16,000 for two or more qualifying individuals, and the maximum reimbursement percentage has been increased from 35 percent to 50 percent.
This is a credit that is adjusted depending on household income (the more you make the less you can claim).
This post was originally published on December 28, 2020.
