Claim Payroll Tax Credits on 2nd Quarter Form 941

Various employer tax credits have been enacted over the last 18 months and have resulted in significant refunds to employers to compensate them for maintaining their work force in these trying times. Today we want to make certain that all employers are prepared to claim the payroll tax credits they are qualified for on their second quarter 2021 Form 941, Employer’s Quarterly Federal Tax Return. The second quarter Form 941 is due on August 2, 2021. We urge all employers to claim applicable credits on timely filed original returns, as returns that require manual processing, which may include amended returns, will take longer to process due to the backlog and delays reported by the IRS. 

Specific payroll tax credits that are available to businesses include the Employee Retention Credit (“ERC”), COBRA Premium Subsidy, and Sick and Family Leave – each of which should be claimed on an employer’s Form 941 filing.  Below are highlights of each credit.

Employee Retention Credit (“ERC”)

The employee retention credit was first enacted under the CARES Act on March 27, 2020, and has been extended and expanded under both the Consolidated Appropriations Act and the American Rescue Plan Act.  It is a refundable payroll tax credit on wages paid between March 12, 2020, and December 31, 2021. 

Wages Paid in 2020

The 2020 credit is equal to 50% of eligible wages, including qualified health plan expenses, up to $10,000 per employee during calendar year 2020, resulting in a maximum annual credit available for each employee of $5,000.

Business owners and family members are not eligible for the credit.

Businesses must satisfy at least one of the requirements below to qualify for the credit:

• Experience a significant decline in gross receipts (defined as a 50% reduction) when comparing any calendar quarter during 2020 to the same quarter of 2019
• Fully or partially suspend operation during any calendar quarter during 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19

Businesses with less than or equal to 100 average monthly full-time equivalent employees (“FTE”) (determined using calendar year 2019) may claim the tax credit for wages paid to all employees during an eligible quarter.

Businesses with greater than 100 average monthly FTE’s may only claim the tax credit for wages paid to employees who did NOT provide services during the eligible quarter.  Stated plainly, credits are only available for employees who continued to be paid but were unable to work due to COVID limitations.

Wages Paid in 2021

The 2021 credit increases from 50% to 70% of eligible wages, capped at $10,000, per quarter, resulting in a maximum quarterly credit of $7,000 or maximum annual credit per employee of $28,000. 

Businesses must satisfy at least one of the requirements below to qualify for the credit:

• For the receipts test, a significant drop is defined as any quarter in the first half of 2021 that is less than 80% (or 20% drop) of the same quarter from 2019. 
• Fully or partially suspends operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19

For 2021, the FTE threshold before a change in the treatment of wages paid increases to 500 from 100 average monthly FTE’s.

WM WISDOM: 

The ERC was expanded in late 2020 to allow an employer who received funds under a Payroll Protection Program Loan (“PPP”) to also claim the ERC so long as the same wages are not used for both.  Care must be taken when submitting for PPP forgiveness to appropriately segregate wages eligible for the ERC from wages eligible for forgiveness.

COBRA Premium Subsidy

The American Rescue Plan Act of 2021 signed into law on March 11, 2021 provides COBRA premium subsidies for up to six months of COBRA continuation coverage from April 1, 2021 through September 30, 2021 for certain “Assistance Eligible Individuals”.  During this period, employers are required to pay 100% of the COBRA premiums for those individuals that are eligible.  On May 18, 2021, the IRS released Notice 2021-31, which provides implementation guidance for employers. 

Assistance Eligible Individuals

• Any individual (employee, spouse and dependents) who is a qualified beneficiary as the result of the reduction of hours of a covered employee’s employment or the involuntary termination of a covered employee’s employment (other than by reason of an employee’s gross misconduct), and
• is eligible for COBRA continuation coverage for some or all of the period beginning on April 1, 2021, through September 30, 2021, and
• elects the COBRA continuation coverage.

In addition to the above, there is an extended election period, which is a 60-day window for individuals who either declined or discontinued COBRA coverage and would have been deemed assistance eligible individuals, or elected coverage and then discontinued before April 1, 2021.  There are a number of extended election period examples in the Notice.

COBRA Premium Assistance Credit

Premium payees are entitled to a payroll tax credit depending on the nature of the coverage.  The payee is determined as follows: 

• For a multiemployer plan, the premium payee is the plan
• For a plan that is not a multiemployer plan and is wholly or partially self-funded, the premium payee is the common-law employer that maintains the plan (i.e., the plan sponsor)
• For all other plans, the premium payee is the insurer

Eligible payees may claim a refundable payroll tax credit for up to the full premium that the premium payee would otherwise charge for COBRA coverage, including the 2% administrative charge.  

WM WISDOM: 

Third-party payroll providers may not be aware of any premium subsidy payments.  It is imperative that payees maintain adequate records of the payments and provide them to the payroll provider so that the credit can be appropriately claimed on the quarterly payroll tax returns.      

In addition, the Notice provides a number of compliance requirements related to COBRA.  We strongly encourage you discuss the requirements with your insurance broker. 

Sick and Family Leave

The American Rescue Plan Act enacted on March 11, 2021 provides credits for employers with under 500 employees who voluntarily extended payments under Families First Coronavirus Response Act of 2020 (“FFCRA”) through September 30, 2021.  Similar to ERC and COBRA Premium Subsidy, eligible employers may claim a payroll tax credit up to a maximum of $511/day for two weeks of sick leave, or up to a maximum of $200/day for twelve weeks of school and childcare closures due to COVID.  

WM WISDOM:

If you voluntarily extend benefits, you must comply with three additional reasons for leave: employee is seeking or awaiting results of COVID-19 testing; employees obtaining the COVID-19 vaccine; or employee is recovering from an injury, disability, illness or other condition related to COVID-19 vaccine.

Significant Refunds For Employers Possible

Depending upon your situation, each of these credits could result in significant refunds to employers.  We have worked with many clients to maximize their benefits and strongly encourage you to contact us to seek advice from one of our experienced team members before applying for any of these credits. 

DISCLAIMER: The WM Update, WM Wednesday Wisdom, WM Daily Update COVID-19, COVID-19 Business Resources, COVID-19 Client News Alerts and other related communications are intended to provide general information, including information regarding legislative COVID-19 relief measures, as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.