As you prepare your 2020 tax return, you’ll likely be looking to reduce your tax liability with any deductions and/or credits for which your business is eligible. According to CPA Practice Advisor, there are several payroll tax-saving opportunities you may wish to take advantage of this year.
Employee Retention Credit
The Employee Retention Credit (ERC) established by the CARES Act is available to employers who fully or partially closed their business operations due to government mandated COVID guidelines and/or experienced a 50+% decrease in gross receipts for any 2020 quarter (as compared to the correlating 2019 quarter.)
The credit is for 50% of the first $10,000 paid to employees from March 12, 2020-Dec 31, 2020.
Family and Medical Leave Credit
We’ve covered the FMLA, or Family and Medical Leave Act, which was established in 1993 to provide protection for employees who need to take an extended period of absence for medical reasons or the addition of a child without risking loss of employment. The Taxpayer Certainty and Disaster Relief Act extended this opportunity through 2020. You may be eligible for the credit if you meet the following criteria:
- You paid at least two weeks of family and medical leave to a full-time employee in 2020
- You paid the employee 50+% of their regular salary during their leave
If you qualify, you can receive 12.5-25% of wages for employees who have worked with your company for at least a year and make less than $72,000 annually.
Work Opportunity Tax Credit
If you hired employees from a disadvantaged group, you may be able to claim the Work Opportunity Tax Credit (WOTC.) This credit was recently extended through 2025 and provides employers with 25% of wages up to $6,000 paid to the employee in their first year of service up to a maximum credit of $1,500. This increases in certain cases, such as with a veteran with a disability they incurred during their years of duty. The maximum for this situation is $9,600. You can read more about WOTC guidelines here.
You may also be eligible for credits as a result of emergency paid leave for employees affected by COVID-19. During the early months of the Coronavirus crisis, the Tax Cuts and Jobs Act was passed, creating a credit for employers who provided this type of leave to their employees as a result of illness or loss of childcare due to the pandemic.
If you have fewer than 500 employees, the cost of this sick leave (up to a maximum of $5,110 per employee) may be an eligible credit on your return, provided that the paid leave was given between April 1 and Dec 31, 2020. This offsets the Social Security component of payroll tax.
Contact your professional tax preparer for information on how these credits may interact and your eligibility for each.