Important note
An employer cannot use the same wages for the Employee Retention Credit and the credits for paid sick and family leave.
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The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, was designed to encourage eligible employers to keep employees on their payroll, despite experiencing financial hardship related to the coronavirus pandemic, with an employee retention tax credit (Employee Retention Credit).
The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, and the American Rescue Plan Act, enacted on March 11, 2021, included changes to extend and modify the credit.
For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020.
Employers who qualify, including PPP recipients, can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.
The credit remains at 70% of qualified wages up to a $10,000 limit per quarter so a maximum of $7,000 per employee per quarter for all of 2021. So, an employee could claim $7,000 per quarter per employee or up to $28,000 for 2021.
Under the ARPA, the ERC is available to eligible employers for wages paid during the third and fourth quarters of 2021.
NOTE: The Infrastructure Investment and Jobs Act amended section 3134 of the Internal Revenue Code to limit the availability of the Employee Retention Credit in the fourth quarter of 2021 to taxpayers that are recovery startup businesses, as defined in section 3134(c)(5). Therefore, taxpayers that are not recovery startup businesses are not eligible for the Employee Retention Credit for wages paid after September 30, 2021.
For more detailed guidance, including information relating to the definitions of qualified wages and eligible employers, as well as information about the applicable gross receipts test, see:
Frequently Asked Questions:
Under the Families First Coronavirus Response Act (FFCRA), businesses could claim two refundable payroll tax credits. The paid sick leave credit and paid family leave credit were available for eligible employers who paid qualified sick leave wages and/or qualified family leave wages from April 1, 2020, through December 31, 2020, and who have fewer than 500 employees. See COVID-19-Related Tax Credits for Paid Leave Provided by Small and Midsize Businesses FAQs for more information.
Beginning January 1, 2021, employers were no longer required to provide federal Emergency Paid Sick Leave (EPSL) or Emergency Family and Medical Leave (EPFL) to employees who might be absent from work due to pandemic related reasons.
However, the COVID Relief Act, part of the omnibus Consolidated Appropriations Act, 2021,provided that if a covered employer voluntarily provides EPSL and EPFL between January 1, 2021 and March 31, 2021, the employer could continue to be entitled to a 100% tax credit for the amount of those payments, through March 31, 2021.
In other words, even though a covered employer was not required to provide EPSL or EPFL after December 31, 2020, the employer could voluntarily do so throughout the first quarter of 2021 and continue to qualify for available tax credits for doing so.
Employers are still no longer required to provide federal EPSL or EPFL to employees.
However, the ARPA significantly modified the Families First Coronavirus Response Act (the “FFCRA”) paid leave credits and extended the period for claiming the modified credits to April 1, 2021 through September 30, 2021.
Self-employed individuals looking to claim the Sick and family leave tax credits, see the information in the Other Individual COVID-19 Related Credits and Deductions page.
See Under the American Rescue Plan, employers are entitled to tax credits for providing paid leave to employees who take time off related to COVID-19 vaccinations for more details, including information about paid leave to employees receiving COVID-19 vaccines. See also Tax Credits for Paid Leave Under the American Rescue Plan Act of 2021 for Leave After March 31, 2021 for responses to frequently asked questions concerning these tax credits.
You can get immediate access to the credits by reducing the employment tax deposits you are otherwise required to make. If your employment tax deposits are not enough to cover the credit, you can request advance payment from the IRS by faxing your completed Form 7200, Advance Payment of Employer Credits Due to COVID-19 to 855-248-0552*. Read the instructions carefully and take time when completing this form. For more information call 833-551-3588.
*Note: The Form 7200 fax line will be shut down after January 31, 2022 and IRS will no longer be accepting Form 7200 submissions. See Early Termination of the Employee Retention Credit, Retaining Employment Tax Deposits in Anticipation of Credits, Shut Down of the Fax Line and Helpful Form 7200 Hints for more information.
If you fully reduce your required employment tax deposits otherwise due on wages paid in the same calendar quarter to employees in anticipation of receiving the credits, and you have not paid qualified leave wages in excess of this amount, you should not file Form 7200. If you file Form 7200, you will need to reconcile this advance credit and deposits with the qualified leave wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and you may have an underpayment of federal employment taxes for the quarter.
Note that a Form 7200 requesting an advance of less than $25 will not be processed. Employers can claim credits of less than $25 on Form 941.
Notice 2021-53 provides guidance to employers about reporting on Form W-2 the amount of qualified sick and family leave wages paid to employees for leave taken in 2021. The notice provides guidance under recent legislation, including the Families First Coronavirus Response Act (FFCRA), as amended by the COVID-Related Tax Relief Act of 2020, and the American Rescue Plan Act of 2021. Employers will be required to report these amounts, for 2021, to employees either on Form W-2, Box 14, or in a separate statement provided with the Form W-2, including providing employees who are also self-employed with the information necessary to determine the amount of any sick and family leave equivalent credits they may claim in their self-employed capacities. The guidance also provides employers with model language to use as part of the Instructions for Employee for the Form W-2 or on the separate statement provided with the Form W-2.
See How to Claim the Credits on IRS.gov for more information.
Notice 2020-54 provided guidance regarding W-2 reporting of qualified sick leave and family leave under FFCRA for wages paid to employees for leave taken in 2020.
See How to Claim the Credits on IRS.gov for more information.
Although the IRS has taken steps to implement rules that prevent the failure to deposit penalty from incurring on employers reducing their deposits in anticipation of claiming the Sick and Family Leave Credits or Employee Retention Credit, some employers may still have inadvertently received notice of the penalty.
No additional actions are needed at this time. The IRS is working to identify these employer accounts and correct them as soon as possible. To avoid receiving a penalty notice in the future, check IRS.gov/form941 for guidance on properly reporting liabilities when reducing deposits.
Employers who are filing Form 7200 should read the instructions carefully and take their time when completing this form to avoid mistakes. Using a reputable tax preparer can also help avoid errors. Mistakes can result in a processing delay, which means it may take longer to get the advanced payment. Review this list of common errors.
You may receive one of the following letters from the IRS as they process Form 7200:
The last day to file Form 7200 to request an advance payment for the fourth quarter of 2021 is the date on which you file your employment tax return for the tax period or January 31, 2022, whichever is earlier. The last date to file Form 7200 is the same whether you file a quarterly Form 941, or an annual Form 943, 944, or CT‐1.
The CARES Act allowed employers, including government employers, to defer the deposit and payment of the employer share of social security tax for deposits and payments due on or after March 27, 2020, and before January 1, 2021, as well as deposits and payments due after January 1, 2021, that were required for wages paid during the quarter ending on December 31, 2020. Payment for one-half of the deferred employer share of social security tax was due by December 31, 2021, and the remainder is due by December 31, 2022.
For more information, see the IRS Deferral of employment tax deposits and payments through December 31, 2020 FAQs.
The President of the United States issued a Presidential Memorandum directing the Secretary of the Treasury to use his authority pursuant to section 7508A of the Internal Revenue Code to defer the withholding, deposit, and payment of certain payroll tax obligations. As a result, the Department of Treasury and the Internal Revenue Service issued guidance allowing employers to defer withholding and payment of the employee’s portion of the Social Security tax, if the employee’s wages or compensation were below a certain amount. Notice 2020-65 made relief available to employers for wages or compensation paid starting September 1, 2020, through December 31, 2020. It applies to payments of taxable wages or compensation to an employee that are less than $4,000 during a bi-weekly pay period, with each pay period considered separately.
Repayment of the employee’s portion of the deferral started January 1, 2021 and will continue through December 31, 2021. Payments made by January 3, 2022, will be timely because December 31, 2021, is a holiday. The employer should send repayments to the IRS as they collect them. If the employer does not repay the deferred portion on time, penalties and interest will apply to any unpaid balance. Employees should see their deferred taxes in the withholdings from their pay.
For more information, see:
Closing your business can be a difficult and challenging task. The Taxpayer Advocate Service (TAS) partnered with IRS to expand its Closing a Business page to help business owners understand the specific actions needed, from a federal tax perspective, for each type of business.
For more information, see the Coronavirus Tax Relief for Businesses and Tax-Exempt Entities page on IRS.gov. You can also visit the Department of Labor’s website, Families First Coronavirus Response Act: Questions and Answers.