Employer tax benefit on the Consolidated Appropriations Act, 2021 (the Act)
1. Extension of paid leave tax credits
Under the FFCRA, employers with under 500 employees generally must provide paid leave to certain individuals impacted by COVID-19. This requirement goes through December 31, 2020, and employers are eligible for a credit against payroll taxes to mitigate the cost of this leave. The Act does not require employers to offer leave beyond December 31, 2020, but provides that eligible employers that do continue to offer this leave can continue to receive the payroll tax credit through March 31, 2021.
2. Employer tax credit for paid family and medical leave
Under sunsetting legislation, employers could claim a general business credit of up to 25% of wages paid to employees during FMLA (Family and Medical Leave Act) leave (subject to certain requirements and limitations) in 2018-2020. The new bill extends this credit through 2025.
3. Employee Retention Tax Credit for January 1, 2021, through June 30, 2021
The Act expands the refundable “employee retention credit” from the CARES Act for the first two quarters of 2021 for employers whose business was fully or partially suspended as a result of COVID-19, or who have a significant decline in gross receipts, to encourage continued payment of employee wages and continued coverage under employer sponsored health plans. The refundable credit in the Act generally equals 70% (it was 50% in the CARES Act) of each employee’s “qualified wages” paid on or after January 1, 2021, through June 30, 2021. As discussed below, whether wages constitute “qualified wages” is determined on a quarterly basis; the maximum amount of qualified wages taken into account for any employee for each quarter in 2021 is $10,000; as a result, the maximum credit per employee is $7,000 per quarter (rather than annual limits as contained in the CARES Act for 2020). It does now allow anyone who took out a Paycheck Protection Program (PPP) loan to claim the ERC. This provides an opportunity to go back and claim the ERC on 2020 wages. However, the CAA also added that the ERC and PPP loan forgiveness can not be claimed on the same wages. In addition, the ordering rule is that wages are first applied to the ERC and then to PPP loan forgiveness. The PPP borrower does have an option, under an election method to be determined by the Secretary of the Treasury, to not take wages into account for the ERC.