COVID-19 has created many uncertainties for employers. If you are a business owner or employer, here are payroll tax relief options to consider this year.
With the new year come new tax considerations, as well as new aid for businesses aiming to stay afloat amid the COVID-19 pandemic. Although 2020 has ended, and even as we enter the vaccination stage, experts suggest that we are still months away from a return to normal, and it will be some time still before economy improves.
As part of the effort to help businesses severely impacted by the coronavirus, the IRS has announced two new employer tax credits designed to take some of the pressure off businesses impacted by cases of sick employees, and employee family members, as well as provide aid to employers who are struggling to pay the bills due to COVID-related government orders.
Those that deferred payroll taxes in 2020 should know what to look out for in 2021, as well as keep an eye on this year’s payroll tax changes and how they might impact businesses.
Taking a Look at Payroll Taxes in 2021
The biggest priority change of employer tax relief to look out for is the Social Security wage base increase (i.e. the maximum amount of taxable wage for Social Security), from $137,000 in 2020 to $142,800 in 2021. This means a total of $142,800 of an individual’s wages may be taxable for Social Security.
The FICA tax rate (combined Social Security and Medicare taxes) remains 7.65 percent (6.2 percent for Social Security, 1.45 percent for Medicare), just as last year. This means that 6.2 percent of the first $142,800 of an employee’s wages must be withheld, alongside another 6.2 percent covered by the employer. There is no wage base limit for Medicare, and employers are required to withhold an additional 0.9 percent for wages earned past $200,000 ($250,000 for married couples who file jointly).
If your employee is working multiple jobs, they may ask you to stop withholding Social Security taxes once they’ve reached their wage base limit. Most of the time, you can’t actually do that – but you can inform them that they’ll be eligible for tax credit the following tax season.
Did You Opt to Defer Payroll Taxes in 2020?
If you were among the minority of employers who opted to defer employer and employee payroll taxes last year, then understand that you are obligated to withhold additional wages to pay back the deferred amount on the employee’s share.
To recap: as part of the government’s efforts to provide aid during the coronavirus pandemic, employers were given the option to defer their share of the payroll taxes for the year, with the caveat that half of the total deferred amount would be due by December 31st, 2021, and the other half by December 31st, 2022. This wasn’t a particularly popular employer tax relief effort, and there was bipartisan criticism of its implementation.
The same option was later made available to certain employees, giving them the choice to defer their share of the payroll taxes for the year (provided they earned $4000 in biweekly wages or less, and other eligibility requirements), with the understanding that the taxes deferred during these months (September through to December 2020) would be added to their withheld taxes during the months of January through April 2021.
This means if your employees were eligible for deferred taxes in the last four months of 2020, the amount deferred would have to be paid back in the first third of this year. Furthermore, your first deadline for half of any payroll taxes you opted to defer will be at the end of the year.
However, it’s important to note that with a new administration, the government may handle this employer payroll tax relief differently, if you did opt to defer. This may become a big ticket issue this year as the federal government and military made it mandatory for own employees to defer their payroll taxes. Be sure to discuss this with your tax professional if the deferrals are relevant to your concerns and keep an eye on any developments.
New Employer Tax Relief Credit Options This Year
Whether you chose to take advantage of the government’s so-called tax holiday or not, there are other ways for you to seek employer payroll tax relief aid this year, particularly if you are struggling to support employees and employee costs.
Last year, the IRS announced two new employer tax credit options to help businesses who have been hit hard by COVID-19 and need relief. These options were the Credit for Sick and Family Leave, as well as the Employee Retention Credit.
– Credit for Sick and Family Leave
These payroll tax relief efforts for employer-provided sick and family leave benefits were meant to coincide with the government’s Families First Coronavirus Response Act (FFCRA), wherein the government required employers with under 500 employees to provide sick and family leave benefits.
Although many people thought that the government’s last relief package for the year (the Consolidated Appropriations Act of 2021, or CAA21) would extend the FFCRA into 2021, it did not.
It did, however, extend the credit for sick and family leave until the end of March 2021 – meaning employers with up to 500 employees are no longer mandated to provide sick and family leave benefits but can receive aid from the government if they choose to provide leave benefits for the first quarter of the year anyway.
Do note that there are stringent documentation requirements to take advantage of the credit, as well as caps in how many benefits are paid out/how long the sick leave or family leave can be, as well as a list of qualifying reasons.
Also keep in mind that the benefits covered by the FFCRA and the Family and Medical Leave Act (FMLA) are separate, meaning that while an employee can’t reset their caps on FFCRA-covered medical and family leave, employers providing medical and family leave in 2021 may still get a tax credit under the FMLA.
– Employee Retention Credit
As part of CAA21, Employee Retention Credit eligibility has been expanded to last until June 31st, 2021. It has also been modified – while it initially provided a 50 percent refundable tax credit for companies closed or shut down by government-mandated COVID-19 lockdowns, this has been changed to 70 percent for the first half of 2021.
Because the coronavirus remains a developing issue, and it’s uncertain what the next few months will look like – and because we are on the cusp of a new administration – it’s possible that employer tax credits and payroll tax relief will be greatly expanded in 2021. It’s also possible that no other changes will occur.
If you’re worried about your taxes this year and how they might be affected by the continued pandemic and multiple successive tax updates, consider discussing your options and concerns thoroughly with a tax professional.