2020 Year-End Tax Guide

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THE MARCUM 2020 YEAR-END TAX GUIDE

COVID-19 Federal Wage-Related Tax Credits

For employers with 100 employees or less The employee retention credit gives much broader access to employers with fewer than 100 employees. Wages to all employees, whether or not the hours were actually worked, are eligible for the credit. Severance wages and wages not subject to Medicare tax are ineligible for the credit. What are the effective dates? The credit is effective for wages paid March 13 through December 31, 2020. Please note: if an employee earned wages at the end of 2020, but the wages were not paid until 2021, the wages paid in 2021 are ineligible for the credit. We recommend running a special payroll as of December 31 to true up any wages eligible for the employee retention credit. How to claim the credit The credit can be claimed on form 941. However, an employer may request an advance payment of the credit on form 7200. The employer can file multiple forms 7200 per quarter. Wages paid between March 13 and 31 should be reported on the Q2 941. It is possible that a company could file its form 941 before it is able to calculate if there is a significant decline in gross receipts in a quarter. In that case, the employer should file a form 941X, amended quarterly payroll tax filing, to claim the credit. Interaction with PPP loan, income taxes, and other credits If a business received a loan under the Paycheck Protection Program, the business is ineligible for the employee retention credit. However, if the business repaid the PPP loan before May 14, 2020, it is still eligible for the employee retention credit. The credit may not be claimed on wages for which the employer is already taking the work opportunity credit, emergency sick leave, or FMLA credits. In other words, the same wages cannot be used for more than one credit. The wages paid under this credit are subject to employee and employer shares of Social Security taxes, unlike the sick and family leave credits.

Documentation and retention period Employers should retain documentation of the calculations of decline in gross receipts. Calculations of the credit and documentation of qualified health plan expenses should also be retained. After claiming the credit on form 941, retain all documentation for at least four years. Provisions for self-employed Self-employed taxpayers are ineligible for the employee retention credit for their own work hours. Wages paid to related individuals, such as a child or parent, are also ineligible for the credit. SUMMARY All of the COVID-19 credits are fully refundable. If the credit is greater than the employer payroll tax liability on form 941, the employer will receive a refund upon the 941 filing. If an error is made on form 7200, advanced payment request, a corrected form cannot be filed. Instead, true up any difference on the quarterly form 941. If there is a mistake made on a quarterly form 941, file an amended quarterly payroll tax return, form 941X. To accommodate all of these changes, form 941 has received a major makeover. The emergency sick leave credit is reported on line 5a(i) and expanded FMLA as reported on line 5a(ii), and such wages are exempt from the 6.2% Social Security tax. If an employee has achieved the Social Security maximum pay base of $137,700 before taking sick leave, do not report these wages on line 5a(i) and 5a(ii). However, the wages are still reported on yet another new component of the form, worksheet one. With these significant changes come many questions. If your business needs further guidance on taking advantage of these credits, reach out to your Marcum advisor for additional resources.