8 Things You Need To Know About The 2021 Payroll Tax Credit

Payroll Tax Credit

Last Updated October 4, 2021

A Payroll Tax is a tax retained from an employee’s salary by an employer who pays it to the government from the employees’ side. The tax is based on how much wage, salary, or tips employers are paying to employees. Employers deduct Payroll taxes straight out of the employee’s earnings and pay them straight away to the Internal Revenue Service (IRS). Payroll taxes are divided into three essential types in the United States:

  1. Federal Income
  2. Medicare
  3. Social Security

Furthermore, The government collects money for federal unemployment programs. Contrary to the United States income tax (which is known as a progressive tax) you only have to pay ‘payroll taxes’ on the income you earn up to a specific limit every year. Any extra income that you earn beyond that limit is untaxed, making the United States payroll tax a recessive tax (Untaxed income limit declared by the United States tax laws is $137,700 for the year 2020 and 2021).

The world economy has been severely affected due to the unfavorable effects of the recent pandemic ‘COVID-19’. The president of the United States signed the Coronavirus Aid, Relief, and Economic Security Act, (CARES Act, alternate name of which is the Phase 3 coronavirus bill), On March 27, 2020, amongst other things it provides immediate refundability of corporate alternative minimum tax (AMT) credits.

What Relief Is Available On Payroll Tax Credit?

‘FFRCA’ (The Families First Coronavirus Response Act) was signed by President Trump on March 18, 2020. It offers employers who have a limited number of employees, eligible for compensation of tax credits that compensate them, dollar-for-dollar, for the sake of the cost of offering paid sick and paid family leaves to their employees. (Leave has to be related to COVID-19).

Emergency Sick Leave Payroll Tax Credit under Families First Coronavirus Response Act

  • It is compulsory that the employer must have not more than 500 employees per entity.
  • The employer must pay employees who request up to 80 hours of leave for looking after themselves if they are affected by COVID-19 or if they have to take care of others.
  • If Credit is limit is below 100% or two-thirds of an employee’s regular salary or day rate plan of $511/$200 subject to the reason for leave.

Emergency Family Medical Leave Payroll Tax Credit under Families First Coronavirus Response Act

  • The employer has less than 500 employees comprising affiliates as specified by FMLA.
  • If an employer gives employees paid leaves. 12 weeks of leave are allowed if they have to take care of a child below the age of 18 in case any care provider is not available due to COVID-19.
  • Credit is limited to the below two-thirds of the employee’s regular pay or daily rate of $200 up to 10 weeks.

CARES Payroll Tax Delay

  • Any Employer regardless of the size can delay its payment of employer Social Security (6.2%) starting the 27th of March, 2020, and ending on 31st of December, 2020.
  • You have to pay 50% by December 31, 2021, with the remainder due by 31st December by the year 2022.

CARES Employee Retention Payroll Tax Credit

  • The conditions that make an employee eligible for CARES employee Retention payroll tax credit.
  • The employer who has discontinued Business activities fully or partially due to COVID-19 related government orders to limit trade, travel, or group meetings is eligible.
  • The employer whose overall income for the 2020 quarter decreased by more than 50% as compared to the similar 2019 quarter.
  • For employers with exceeding 100 employees, the tax credit is 50% of salary up to $10,000 paid to employees who are not doing work. The maximum loan approved for each employee is $5,000.
  • For employers having 100 or less than 100 employees, the tax credit is 50% of wages up to $10,000 paid to all employees. The maximum loan approved for each employee is $5,000.
  • The employer has decided to take services from a controlled group.
  • An Employer who receives an SBA loan under the Paycheck Protection Program is not eligible for the tax credit.

Actions Employers Should Take To Get Relief Available On The Payroll Tax Credit

  • They must Evaluate their Eligibility: Employers ought to identify the payroll tax relief options for which they qualify.
  • They must Calculate Tax Relief: Employers need to calculate the number of eligible tax incentives.
  • They should Recover Cash: Employers need to recover available funds using the credit, refund claim, and/or tax deferment method.
  • They should Complete Documentation: Employers must initiate methods to gather the information necessary from employees to support their credits, maintain the required employee and payroll records, and provide written records of the technique that has been used to determine the credits and postponements that they took.

The US government is offering many programs to provide maximum relief. These programs are offered to help business owners receive immediate relief in crisis management associated with COVID-19. The Payroll Tax Credit (also known as the Employee Retention Credit) program is one of them. This program is offered with a vision to provide relief to small to mid-sized businesses men.