The relationship between COVID-19 and employment taxes is an everchanging one marked with uncertainty and, as a result, stress for many — employers and employees alike. If you are an employer or employee, gaining some insight on some acts passed regarding the pandemic and employment taxes could benefit you now and in the future, and Prospect Financial Solutions is eager to help.
Prospect Financial Solutions is an accounting firm based in Southern California. We understand that your business is always adjusting, and the pandemic has not changed that; in fact, many businesses have had to make more adjustments now more than ever due to COVID-19 and its effect on the economy. Even more, many employers and employees have questions relating to COVID-19 and employment taxes, and what resources are available to help them financially navigate through this. If you are an employer or employee, and this matter of COVID-19 and employment taxes has interested you, the Prospect team encourages you to keep reading to receive beneficial financial insight and professional guidance.
Our team of financial advisors has a passion for finance and a drive to ensure your business receives the support it needs during these economically difficult times! We have acquired a thorough understanding of business growth and cycle through years of experience and when we pair our knowledge with our hands-on approach, the result is our ability to deliver valuable assistance to your business during this pandemic. With that in mind, the Prospect team is going to consider two aspects of COVID-19 and employment taxes: credits and deferrals. These two options for tax relief during COVID-19 can help guide you as an employer or employee.
COVID-19 and Employment Taxes
The government has established COVID-19 regulations in efforts to bring relief to businesses during these times. According to the IRS, in addition to an article written on the BDO United States website about COVID-19 and employment taxes, this was stated regarding the importance of (and differences between) credits and deferrals:
Two COVID-19 aid packages were recently legislated to provide employers with financial assistance via credits or deferrals against their payroll taxes: Families First Coronavirus Response Act (FFCRA) and Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Credits The Families First Coronavirus Response Act was enacted earlier this year in March and provides small and midsize employers with refundable tax credits. This is designed to reimburse employers, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for COVID-19-related leave. This provides 100% of the funds needed by employers with fewer than 500 employees to pay federally mandated emergency leave to employees caring for themselves or others for COVID-19 reasons. To claim the COVID-19 tax-related credits, the official IRS website FAQ page says:
- Eligible Employers will report their total qualified leave wages and the related credits for each quarter on their federal employment tax returns, usually Form 941*. Employer’s Quarterly Federal Tax Return. Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.
- In anticipation of receiving the credits, Eligible Employers can fund qualified leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified leave wages) by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance from the IRS.
- *Could also be claimed on Form 943, Form 944, or Form CT-1.
Regarding the amount of credit an eligible employer may receive for qualified sick leave wages it pays, a fully refundable tax credit equal to 100 percent of the qualified sick leave wages (and allocable qualified health plan expenses and the Eligible Employer’s share of Medicare tax on the qualified sick leave wages) it pays may be claimed.
Regarding how much sick leave wages are determined for which an eligible employer can receive credit, this amounts that must be paid for qualified sick leave wages will vary depending on the reason for which the employee is unable to work or telework, the duration of the employee’s absence, the employee’s hours, and the employee’s regular rate of pay (or, if higher, the federal minimum wage or any applicable State or local minimum wage).
Deferrals The Coronavirus Aid, Relief, and Economic Security Act was enacted shortly after the FFCRA Act toward the ending of March. This act encourages eligible employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19, by offering an employee retention tax credit. Similar to the FFCRA Act, this employee retention credit will be claimed on your employment tax return (Form 941, Form 943, Form 944, or Form CT-1). Essentially, employers who continue to pay employees instead of sending them to the unemployment system will be provided with partial assistance. In addition, the CARES Act permits employers to defer payment of their remaining 2020 Social Security payroll tax liabilities into 2021 and 2022. All this assistance is delivered through the existing system used by employers to deposit federal payroll taxes. Taken together, these provisions provide significant relief for employers that continue paying wages to employees.
Self-Employed Keep in mind that a similar tax credit for eligible employers is also available to self-employed individuals! An eligible self-employed individual is defined as an individual who regularly carries on any trade or business within the meaning of section 1402 of the Code and would be entitled to receive qualified sick leave wages or qualified family leaves wages under the FFCRA if the individual were an employee of an Eligible Employer (other than himself or herself) that is subject to the requirements of the FFCRA. Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”
The IRS breaks down how “qualified sick leave equivalent amount” for an eligible self-employed individual is calculated:
For an eligible self-employed individual, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $511 or 100 percent of the “average daily self-employment income” of the individual for the taxable year. This applies if the individual is unable to work or telework for the following reasons:
- Is subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
- Is experiencing symptoms of COVID-19 and seeking a medical diagnosis,
For an eligible self-employed individual, the qualified sick leave equivalent amount is equal to the number of days during the taxable year that the individual cannot perform services in the applicable trade or business for one of the three above reasons, multiplied by the lesser of $200 or 67 percent of the “average daily self-employment income” of the individual for the taxable year. This applies if the individual is unable to work or telework for the following reasons:
- Is caring for an individual who is subject to a Federal, State, or local quarantine or isolation order related to COVID-19, or has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
- Is caring for a child if the child’s school or place of care has been closed, or child care provider is unavailable due to COVID-19 precautions; or
- Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor,
In either case, the maximum number of days a self-employed individual may take into account in determining the qualified sick leave equivalent amount is ten.
Southern California’s Tax, Bookkeeping, and Payroll Financial Services Partner
Though the pandemic has changed a lot in terms of how we operate on an individual and global level, Prospect Financial Solutions believes that we should not change our strategy simply because the world is changing. This is because our strategy works. We still believe in utilizing different strategies to tackle the distinct challenges in which many businesses face! For small business owners, the guidance of an experienced advisor who recognizes the importance of close-knit communication along with a tailored and holistic approach to finance is a crucial component to growth and long-term success. Our firm is here to provide the back-office management–including bookkeeping, tax preparation, and payroll–that your business requires to flourish in this economy.
We believe in solution-based thinking when planning for your futures as our clients and we can deliver the services your small business needs to live up to its potential. If you have questions about COVID-19 and employment taxes, we have answers.
Prospect Financial Solutions is the best firm for small businesses because we will adapt with you as you grow or as the world around us changes. When you work with us, our objective is to build a lasting relationship that deepens as your business evolves. Contact us for your financial needs, including employment taxes.