Tax credits can ultimately save your company money during tax season, and really make a difference over time. Learning about the payroll tax, and the tax credits your business qualifies for every year ensures you can claim the credit right for you.
What are Tax Credits
A tax credit is money you can subtract directly from your business taxes owed to the IRS. A tax credit reduces the direct amount you ultimately owe.
It’s easy to get tax credits and tax deductions confused, as they both are benefits for companies, but the main difference is that tax deductions reduce the amount of taxable income, while a tax credit reduces the tax you owe.
How Can Tax Credits Help You
Tax credits are incredibly helpful for businesses as they actually reduce the total tax due, not just taxable income (as a tax deduction would). This means with every tax credit, your business saves. For some tax credits, you can even apply them to a previous tax filing or a future file. For example, (keeping in mind there are a tax credit limit businesses have) if you have reached that limit one year, you may be able to apply that credit to a previous or future year filing, if your credits are applied for the future, it’s called a carryforward.
Knowing that these tax credits can directly impact the amount you owe, consider studying up what credits you may qualify for. To help you do so, we’ve outlined four common business tax credits, especially applicable during the pandemic, and how you can file to get them.
1. Employee Retention Credit
The federal government created the Employee Retention Tax Credit during the pandemic to help employers with wages and keeping employees on the payroll. Originally this was a part of the Cares Act (and PPP borrowers were not eligible) but after December 2020 PPP borrowers were eligible to claim and in 2021 the amount to claim increased. This is a refundable tax credit against certain employment taxes, reaching up to 50% of qualified wages an eligible employer pays after March 12, 2020, and before January 20, 2022. Refundable means that regardless of what the business paid in employment taxes they will receive the full credit amount. If you receive this tax credit, you can directly decrease payroll tax deposits you otherwise would be subject to, or in some cases, you may qualify for an advance payment.
For every employee a business has, their wages paid can be counted to determine the amount of the 50% credit.
- In 2020 original claim amount was $5,000 per employee per quarter
- In 2021 that claim amount moved to $7,000 per employee per quarter
If you’ve already paid employment taxes, this credit can also be applied to future deposits. Qualified wages, in this case, will depend on how many employees you currently have.
For example, suppose your company has more than 100 full-time employees. In that case, qualified wages include those wages and certain health care costs (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. However, you can only count wages up to the amount the employee would have been paid for working an equivalent duration during 30 days preceding economic hardship.
On the other hand, suppose you have less than 100 full-time employees, qualified wages are those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees that are providing services.
Qualifying for Employee Retention Credit
You may qualify for the Employee Retention Credit if you experienced/are experiencing any of the following.
- Full or partial suspension of operations during any quarter because of government orders limiting commerce, travel, or group meeting due to COVID-19
- A significant decline in gross receipts
The IRS outlines that to qualify this also means it begins
- on the first day of the first calendar quarter of 2020
- for which an employer’s gross receipts are less than 50% of its gross receipts
- for the same calendar quarter in 2019.
and it ends
- on the first day of the first calendar quarter following the calendar quarter
- in which gross receipts are more than of 80% of its gross receipts
- for the same calendar quarter in 2019.
The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.
However, you may not qualify if,
- You are already receiving a small business interruption loan, under the paycheck protection program
- Qualified wages for this credit do not include wages if you received a tax credit for paid sick and family leave under the families first coronavirus response act.
- Wages cannot be counted for paid family and medical leave
- Employees are not counted if your business allowed a work opportunity tax credit
How to Recieve Employee Retention Credit
If you do qualify for the Employee Retention Credit, you must report your total qualified wages and related health insurance costs for each quarter on your employment tax forms (for most, this will be Form 941,). The credit then will be taken against your employer’s share of the social security tax, and any excess is refundable under normal procedures.
Another option is in preparation to claim the credit is to retain an amount that would have been deposited; including federal income tax withholding, the employee share of social security and medicare taxes, up to the amount of credit without penalty-- however, be sure to count any reductions for paid sick leave and family leave the credit.
2. Paid Leave for Vaccines Credit
As a part of the larger American Rescue Plan Act, and to encourage vaccines, the government established a vaccine credit for employers to give paid time off for employees to get vaccinated. For example, if you offer employees a paid day off in order to get vaccinated, you can receive a tax credit equal to the wages paid to employees for that day (up to certain limits). The tax credit is for any small business with less than 500 employees and covers up to $511 for every employee vaccinated per day.
Qualifying for Vaccine Credit
Any business with under 500 employees that gives employees paid time off to get vaccinated can qualify to claim this tax credit.
How to receive Vaccine Credit
In preparation for you to claim credit on Form 941, you can keep the federal employment taxes you otherwise would have deposited; including federal income tax withheld from employees, employees, and employer's share of social security and medicare taxes.
3. Sick and Family Leave credits
To give employees and employers the ability to care for themselves and their families during coronavirus, the government created a tax credit for sick and family leave, as a part of the larger government COVID tax relief and the family rescue plan. This includes,
- Any employee that is unable to work because of coronavirus, or has to self-quarantine due to coronavirus symptoms- is entitled to up to ten days (or 80 hours) at their regular rate of pay, or if it’s higher, the federal minimum wage, up to $511 but no more than $5,110.
- Any employee that is unable to work due to caring for someone with coronavirus, or a child because of closed childcare or caretaker is unable to due to coronavirus symptoms- is entitled to up to two weeks (up to 80 hours) at ⅔ of their pay, or if higher the federal or state minimum wage, up to $200 per day, but no more then $2000.
- Any employee unable to work due to child care for a child whose school or place of care is closed due to coronavirus- is entitled to a paid family leave of ⅔ of their regular pay, up to $200 per day, and $10,000 in total. Up to 10 weeks can be counted towards family leave credit.
As a business, you are entitled to a credit in the full amount of the required sick leave and family leave you gave, plus any health plan expenses, and your employee share of Medicare tax on leave for the period April 1, 2020, through December 31, 2020.
Qualifying for the sick and family leave tax credits
If you are a small business with fewer than 500 employees you qualify for the sick and family leave tax credits.
How to Receive Sick and family leave credits
The refundable credit is applied against employment taxes on wages. Similar to the other credits you can reduce your federal employment tax deposits in anticipation of credit, or ask for an advance of credit.
4. Workers Opportunity Tax Credit
Unlike the first three credits we’ve outlined, the worker's opportunity credit is unrelated to the pandemic or the American rescue plan act. This tax credit is for any business that hires certain targeted groups that have consistently faced significant barriers to employment, in hopes to diversify the workplace and create more access to jobs.
Qualifying for Workers Opportunity Tax Credit
To qualify for the credit you must have hired from one of the following groups, as outlined by the IRS,
- Qualified IV-A individual: An individual who is a member of a family receiving assistance under a State plan approved under part A of title IV of the Social Security Act relating to Temporary Assistance for Needy Families (TANF). The assistance must be received for any 9-month period during the 18-month period ending on the hiring date.
- Qualified Veteran: A “qualified veteran” is a veteran who is any of the following the IRS outlines,
- A member of a family receiving assistance under the Supplemental Nutrition Assistance Program (SNAP) (food stamps) for at least 3 months during the first 15 months of employment.
- Unemployed for a period totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date.
- Unemployed for a period totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.
- A disabled veteran is entitled to compensation for a service-connected disability hired not more than one year after being discharged or released from active duty in the U.S. Armed Forces.
- Qualified ex-felon: Hired within a year of being convicted of a felony, or released from prison
- Designated community resident: An individual at least 18 and under 40, that resides within an empowerment zone, an enterprise community, or a renewal community and continues to live there after employment.
- Vocational rehabilitation referral: An individual who has a physical or mental disability and has been referred to the employer while receiving or upon completion of rehabilitative services pursuant to:
- A state plan approved under the Rehabilitation Act of 1973
- An Employment Network Plan under the Ticket to Work program
- A program carried out under the Department of Veteran Affairs.
- Qualified summer youth employee: An individual between the ages of 16 and 18, employed between May 1 and September 15th and lives in an empowerment zone, enterprise community, or renewal community.
- Qualified SNAP benefits recipient: At least 18 years old, but under 40 and a member of a family that received SNAP benefits for the previous 6 months or at least 3 of the previous 5 months.
- Qualified SSI recipient: An individual where if the month in which this person received SSI benefits is within 60 days of the date this person is hired.
- Long term family assistance recipient: If at the time of hiring this individual
- Received assistance under an IV-A program for a minimum of the prior 18 consecutive months
- Received assistance for 18 months beginning after 8/5/1997 and it has not been more than 2 years since the end of the earliest of such 18-month period
- Ceased to be eligible for such assistance because a Federal or State law limited the maximum time those payments could be made, and it has been not more than 2 years since the cessation.
- Qualified long-term unemployment recipient: An individual who has been unemployed for not less than 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all of the unemployment period.
How to Receive Workers Opportunity Tax Credit
To be eligible and receive this tax credit, you must obtain certification that an individual is a member of the targeted group before you can claim the credit. You also must file Form 8850, with a respective state agency within 28 days after hiring. If you have specific questions you should ask your state workforce agency.
However, you should be aware that this credit is limited to the amount of business income tax liability or social security tax owed.
How These Tax Credits Have Helped Other Companies
The government has created tax credits to help businesses, and as you may have noticed, specifically to bolster up small businesses. Tax credits have helped other small businesses by giving them a tax break and using that money for other important investments. Ultimately, tax credits can help your businesses grow.