On Dec. 27, 2020, the president signed the Consolidated Appropriations Act, 2021 (COVID Relief Act). In addition to creating new programs, this legislation modified or added to the programs established in the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief and Economic Security (CARES) Act.
Please note the following information is intended for our Workforce Acceleration and Workforce Administration customers. Workforce Optimization customers should reach out to their WO Insperity service team for information applicable to them.
What are the primary payroll impacts of the COVID Relief Act?
The COVID Relief Act contains numerous business implications, including:
- Extending and modifying the FFCRA paid sick and family leave payroll tax credits for an additional three months through March 31, 2021.
- Removing the FFCRA mandate to provide paid sick leave or paid family leave beyond Dec. 31, 2020. Employers may, but are not required to, provide paid sick leave or paid family leave for COVID-19-related illness through March 31, 2021. The credits are still available for employers offering this paid sick or family leave.
- Extending and modifying the Employee Retention Credit (ERC), originally created in the CARES Act, for wages paid through June 30, 2021. These modifications have prospective and retrospective components:
- Prospective highlights
- Expands the tax credit to 70% of qualified wages up to $10,000 per employee per applicable quarter in 2021; previously 50% of qualified wages up to $10,000 for calendar year 2020.
- Allows for a gross receipt decline of only 20% rather than the previous requirement of a gross receipt decline of 50%.
- Expands the definition of eligible small employer to include companies with 500 employees rather than the previous limit of 100 employees. These companies can now also claim ERC credit for wages earned while employees were working, in addition to the credit for wages earned while employees are not working.
- Retrospective highlights
- Qualified 2020 wages not paid through forgiven PPP loans may qualify for ERC
- Insperity is waiting for implementation guidance to understand how the Treasury Department intends to fund these credits; Insperity makes daily deposits for all federal payroll taxes; therefore, the Treasury Department holds all applicable deposits related to these possible retroactive credits for 2020.
- Qualified 2020 wages not paid through forgiven PPP loans may qualify for ERC
- Prospective highlights
The COVID Relief Act extended the FFCRA sick and family leave credits through March 31, 2021. The ERC was extended through June 30, 2021. The Employer Social Security Payroll Tax Deferral was not extended.
How do I handle FFCRA leave wages in 2021?
In 2020, Insperity created FFCRA leave earning and memo codes for your payroll reporting needs. Your use of these codes is instrumental in supporting your receipt of any payroll tax credits available to you through FFCRA. Eligible wages that are reported with these codes may qualify for a payroll tax credit through March 31, 2021:
Leave Earnings for Qualified Wages
- Emergency Paid Sick Leave (EPSL)
- EPSL_EE – EPSL-Employee
- EPSL_FAM – EPSL-Family 2/3
- Emergency Paid Family Leave (EPFL)
- EPFL – EPFL-Day 11+ 2/3
Leave Memos for Qualified Health Plan Expenses (QHPE)
- Emergency Paid Sick Leave (EPSL)
- COVMEDSICK – COV Med ER Sick
- Emergency Paid Family Leave (EPFL)
- COVMEDFMLA – COV Med ER FMLA
By using the EPSL and EPFL pay codes, you assert you are entitled to receive incentives provided by FFCRA. Under FFCRA, payroll tax credits for EPSL and EPFL are applicable only to employers with less than 500 employees. Credits will continue to generate automatically when you process payrolls that include FFCRA Emergency Paid Sick Leave (EPSL) earnings, Emergency Paid Family Leave (EPFL) earnings, and related memo codes for qualified health plan expenses (QHPE).
Am I required by the COVID Relief Act to pay EPSL and EPFL qualified wages to my employees?
No. It is now an employer’s choice to pay qualified FFCRA wages. This act allowed for paid leave tax credits for wages and compensation paid after Dec. 31, 2020 and on or before March 31, 2021, for organizations qualified to offer these wages in 2020.
What type of records should clients maintain to substantiate EPSL and EPFL tax credits in the event of a future IRS audit?
The IRS has instructed all employers to maintain written documentation from employees requesting leave and the reasons for such leave under the FFCRA for four years. For more specific information, please consult with your tax advisor and review the IRS website for how an employer should substantiate eligibility for tax credits for qualified leave wages.
How was the ERC amount originally determined by the CARES Act?
The CARES Act provided eligible employers with an ERC, a payroll tax credit for 50% of the qualified wages (up to $10,000 per employee per year) paid by employers during the COVID-19 crisis. The ERC applied to wages paid between March 13 – Dec. 31, 2020, and was available to employers whose:
- Operations were fully or partially suspended due to a COVID-related government ordered “shut-down order” or
- Gross receipts declined by more than 50% when compared to the same quarter in the previous year.
Therefore, the payroll tax credit was up to $5,000 per employee. The payroll tax credit was computed using 50% of the first $10,000 of “qualified wages” paid to an eligible employee, which may have included the employer’s contribution to the employees’ health insurance costs but excluded any amounts the employer already received for a payroll tax credit for EPSL and/or EPFL. For employers with more than 100 full-time employees, qualified wages were further limited to wages paid to employees when they were not providing services due to the reasons specified above. For employers with 100 or fewer employees, employee wages qualified for the credit regardless of whether the employee was working or not working.
How will the ERC amount be determined for 2021 with the COVID Relief Act modifications?
The COVID Relief Act provides eligible employers with an ERC, a payroll tax credit for 70% of the qualified wages (up to $10,000 per employee per quarter for Q1 and Q2 2021) paid by employers during the COVID-19 crisis and applies to wages paid between Jan. 1 and June 30, 2021. The ERC is available to employers whose:
- Operations were fully or partially suspended due to a COVID-related government ordered “shut-down order” or
- Gross receipts declined by more than 20% when compared to the same or prior quarter in the previous year.
Therefore, the payroll tax credit is up to $7,000 per employee per quarter for Q1 and Q2 2021. The payroll tax credit is computed using 70% of the first $10,000 of qualified wages paid to an eligible employee per quarter, which may include the employer’s contribution to the employees’ health insurance costs. For employers with more than 500 full-time employees, qualified wages will be further limited to wages paid to employees when they are not providing services due to the reasons specified above. For employers with 500 or fewer employees, employee wages may qualify for the credit if the employee is working or not working.
How will Insperity support the ERC?
Insperity will continue to support the ERC in isolved®. If you are eligible for Employee Retention Credit (ERC) in 2021, you will need to complete the Insperity COVID-19 Tax Credit Adjustment Form and send it to Insperity Tax, so ERC credits can be entered in isolved. The form and instructions can be requested from your payroll specialist.
Insperity is waiting for additional guidance from the IRS and Treasury on how to apply Employee Retention Credits for 2020 wages that are newly eligible for credit.
How will these tax credits be handled in payroll?
If you have FFCRA leave or ERC credit available when you process payroll, your 941 tax liabilities will be automatically reduced. If your 941 tax liability is reduced to zero and you still have credit available, it will be applied to subsequent payrolls in the first quarter of 2021. If you do not want unused credits to carry forward, you can send the Insperity Request to Stop Tax Credit Carryovers to Insperity Tax and claim your credits directly from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19. You must notify Insperity Tax at ips.tax@insperity.com each time you file Form 7200, so your credit refunds are reflected properly on your tax returns. Do not request payment from the IRS for tax credits that have already been applied to payrolls in isolved. If you still have unused credit at the end of the quarter, it will be reflected as an overpayment on your Q1 941.
Will my company be required to repay these payroll tax credits in the future?
Payroll tax credits due to FFCRA leave or ERC credit do not represent a payroll tax deferral or loan from the Treasury Department. No future repayment of the tax credits is required of employers.
Did the COVID Relief Act extend the Employer Social Security Tax Deferral that was available in the CARES Act?
The CARES Act provided eligible employers with a delay in the remittance of the employer portion of Social Security tax on wages paid pursuant to the Deferral provision of the CARES Act through Dec. 31, 2020. The employee portion of Social Security and the employee and employer Medicare taxes were not eligible for the Deferral.
The COVID Relief Act did not extend the deferral for 2021. Accordingly, all deferral elections terminated on Dec. 31, 2020.
If I elected to use the Social Security Tax Deferral in 2020, who is responsible for making Future Tax Deposits?
As mandated by the CARES Act, Insperity clients who elected the deferral will be responsible for making all Future Tax Deposits and completing any associated tax forms to be submitted to the IRS (as instructed by the Treasury Secretary). These deposits are not required to begin until Dec. 31, 2021. Typically, Social Security taxes are remitted to the IRS shortly after processing each payroll. However, for those employers who elected the deferral in 2020, 50% of the deferral is payable to the IRS by Dec. 31, 2021, and 50% is payable by Dec. 31, 2022 (Future Tax Deposit).
What updates were made to the Paycheck Protection Program (PPP) by the COVID Relief Act?
The COVID Relief Act reopened the PPP loan program to allow businesses to apply, even if they have already received a PPP loan previously. For businesses who have not previously received a PPP loan, the SBA has reopened first time (“First Draw”) PPP loans to help small businesses with payroll costs.
For business who have previously received a PPP loan, a subsequent loan (“Second Draw”) may be available if they meet certain eligibility requirements. These Second Draw loans, up to $2 million, are available to borrowers with businesses that have 300 or fewer employees and whose revenue has declined 25% or more in any quarter of 2020 compared with the same quarter in the previous year. Those who apply for the Second Draw loan must have used or will use all the funds provided to them with their first PPP loan before the disbursement of this second loan.
Loan applications must be filed by March 31, 2021, but applicants are advised to apply as soon as possible since funds are limited.
For more information on the extension of the PPP loan program, visit here.
How can I obtain wage and payroll tax information related to the Paycheck Protection Program loan (PPPL) process?
Insperity and isolved continue to review these requirements as the program evolves and have published online reports to assist clients with this process, based on the laws and applications issued prior to the COVID Relief Act.
- The existing CARES Act Retention Credit Report <100 ees may be run using the payroll beginning when an employer’s loan proceeds were exhausted in order to ensure they are not taking a credit on the same wages that were paid by a PPP loan whose proceeds are forgiven.
- Clients are encouraged to use the CARES PPP Loan Forgiveness Report and CARES Act Retention Credit Report as a guide to assist them in determining:
- 1) actual payroll costs eligible for forgiveness and
- 2) qualified wages and allocable health care expenses eligible for the ERC
- As part of the new provisions, the Employee Retention Tax Credit has been extended through June 30, 2021 with new calculations
- Due to changes for the ERC in the COVID Relief Act, there will be two new reports created:
- CARES Act Retention Credit < 500 ees
- This report will be similar to the original report for <100 employees, but will calculate the credit at 70% of wages up to $10,000 per quarter starting Jan. 1, 2021
- CARES Act Retention Credit > 500 ees
- This report will be similar to the original report for >100 employees, but will calculate the credit at 70% of wages up to $10,000 per quarter starting Jan. 1, 2021
- Note: If an employer took the maximum credit in 2020, they are eligible to take the maximum credits in 2021 as well
- Note: If a 2021 credit has been entered in isolved prior to the reports being available, the reports will include any 2021 credits previously entered
- CARES Act Retention Credit < 500 ees
- The original reports for CARES Act Retention Credit (< 100 ees and > 100 ees) will have “2020” added to their titles to distinguish the 2020 guidelines and calculations of the reports
You can read more about these reports in the isolved University here.
Insperity is here to help
Insperity has a team of COVID-19 experts who are available to help you. This team can help you understand the reports available to you in isolved, how to process FFCRA leave wages and how to take advantage of the ERC in isolved. Your dedicated payroll specialist can connect you with one of these experts. Insperity is not a law firm or a registered public accounting firm; therefore, this information should not be considered tax or legal advice. All clients should consult with their own tax and legal advisors regarding their company’s unique circumstances.