Top Tax Breaks For Businesses & Employers 2021Published:
It’s Been a Tough Year – Here’s How Companies & Business Owners Can Get Some Tax Relief
Running a business can be challenging enough on its own, but this past year and a half has been particularly difficult. Fortunately, there is some tax help available for business owners and employers who are trying to manage their companies in an economic landscape impacted by COVID-19.
This article covers the top business tax breaks for 2021, with information provided by IRS news releases, notices, and related reports.
Work Opportunity Tax Credit (WOTC)
Many businesses are facing a tight job market. The IRS reminds employers that there’s a valuable tax credit available to those who hire long-term unemployment recipients and other groups of workers facing significant barriers to employment. For any business now hiring employees, the Work Opportunity Tax Credit (WOTC) may be helpful.
The WOTC is a long-standing tax benefit that’s designed to encourage employers to hire workers certified as members of any of ten targeted groups facing barriers to employment. Specifically, the 10 groups are as follows:
- Temporary Assistance for Needy Families (TANF) recipients
- Unemployed veterans, including disabled veterans
- Formerly incarcerated individuals
- Designated community residents living in Empowerment Zones or Rural Renewal Counties
- Vocational rehabilitation referrals
- Summer youth employees living in Empowerment Zones
- Supplemental Nutrition Assistance Program (SNAP) recipients
- Supplemental Security Income (SSI) recipients
- Long-term family assistance recipients
- Long-term unemployment recipients
“Long-term unemployment recipients” refers to people who have been unemployed for at least 27 consecutive weeks and have received state or federal unemployment benefits during part or all of that time. Legislation that was enacted in December 2020 extended the WOTC through the end of 2025.
To qualify for the Work Opportunity Tax Credit, an employer must first request certification by submitting Form 8850 (Pre-screening Notice and Certification Request for the Work Opportunity Credit) to their State Workforce Agency (SWA). This form should not be submitted to the IRS.
Eligible businesses can claim the WOTC on their federal income tax return. The credit is first figured on Form 5884 (Work Opportunity Credit) and then is claimed on Form 3800 (General Business Credit). The amount of the credit is generally based on wages paid to eligible workers during the first year of employment.
Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) was created by the CARES Act and is designed to encourage businesses to keep employees on their payroll. It’s a fully refundable tax credit that’s worth up to 50% of the qualified wages (including qualified health plan expenses) that an eligible employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, which means that the maximum credit amount is $5,000.
Eligible employers are those businesses with operations that have been partially or fully suspended because of governmental orders due to COVID-19, or businesses that have a significant decline in gross receipts compared to 2019. Eligible employers can reduce their federal employment tax deposits in anticipation of the Employee Retention Credit. They can also request an advance of the ERC for any amounts not covered by the reduction in deposits. The advanced ERC payments will be issued to employers by paper check.
According to the IRS, a “significant decline in gross receipts” begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941) for the applicable period. If a reduction in the employer’s employment tax deposits is not sufficient to cover the credit, certain employers may receive an advance payment from the IRS by submitting Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
For the latest information about the Employee Retention Credit, see IRS Notice 2021-49.
RELATED: The Earned Income Tax Credit (EITC)
Tax Credits for Paid Sick and Family Leave
Many businesses that have been severely impacted by COVID-19 can qualify for another new employer tax credit: the Credit for Paid Sick and Family Leave.
The American Rescue Plan Act (ARPA) of 2021 includes a provision that allows employers to claim tax credits for providing paid leave to employees who take time off for reasons related to COVID-19. It allows small and mid-size employers, and certain governmental employers, to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19, including leave taken by employees to receive or recover from COVID-19 vaccinations.
These tax credits are available to eligible employers for wages paid for leave that occurs from April 1, 2021 through September 30, 2021. An eligible employer is any business, including a tax-exempt organization, with fewer than 500 employees. An eligible employer also includes certain governmental employers. Note that self-employed individuals are eligible for similar tax credits.
The paid leave credits under the ARPA are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, which means that the employer is entitled to payment of the full amount of the credits (in the form of a tax refund, if applicable) if it exceeds the employer’s share of the Medicare tax. Here’s how the Paid Sick and Family Leave tax credits are calculated:
- The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons for up to 2 weeks (80 hours) – limited to $511 per day and $5,110 in the aggregate – at 100% of the employee’s regular rate of pay.
- The tax credit for paid family leave wages is equal to the family leave wages paid for up to 12 weeks – limited to $200 per day and $12,000 in the aggregate – at 2/3rds of the employee’s regular rate of pay.
The amount of these tax credits is increased by allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of Social Security and Medicare taxes paid on the wages (up to the respective daily and total caps).
Eligible employers report their total paid sick and family leave wages (plus the eligible health plan expenses and collectively bargained contributions and the eligible employer’s share of Social Security and Medicare taxes on the paid leave wages) for each quarter on their federal employment tax return – usually Form 941 (Employer’s Quarterly Federal Tax Return).
RELATED: The Expanded Child Tax Credit (CTC)