Important Tax Changes in the New COVID Relief Law for Businesses

Learn about the business tax law changes introduced by the American Rescue Plan Act.

The American Rescue Plan Act (ARPA) passed by Congress contains several provisions designed to help businesses still struggling to survive through the COVID-19 pandemic. Among other things, the new law extends and expands several COVID-related business tax credits. These tax credits are “refundable”—the full amount is paid to the business by the IRS as a tax refund even if it owes no taxes. Thus, they can be worth a lot.

Sick and Family Leave Tax Credits for the Self-Employed Extended to 2021

Previous COVID-19 relief legislation created new sick leave and family leave tax credits for the self-employed. These were for 2020 only. However, ARPA extends these credits to sick and family leave taken during April 1, 2021, through September 30, 2021.

  • Sick leave credit. You qualify for the sick leave credit if you can't work or telework because you have to self-isolate or quarantine, are experiencing symptoms and need to obtain a diagnosis, have been exposed to COVID-19 and are unable to work pending test results, need to get vaccinated, or are recovering from a vaccination. The sick leave credit is equal to 100% of the average net self-employment income you earn per day for a maximum of 10 days. The credit is capped at $511 per day. Thus, the maximum credit is $5,110.
  • Family leave credit. You qualify for the family leave credit if you can't work or telework because you have to care for a son or daughter under 18 years of age whose school or place of care has been closed due to COVID-19; or you're caring for any person subject to a quarantine order or advised by a health care provider to self-quarantine. The family leave credit is equal to 67% of the average self-employment income you earn per day for a maximum of 50 days. But the credit is capped at $200 per day. Thus, the maximum credit is $10,000.

To calculate the credit, you must determine your average daily net self-employment income. Divide your total 2021 net self-employment income by 260. For example, if your 2021 net self-employment income is $70,000, your daily self-employment income is $269. Your sick pay credit is a maximum of 10 days x $269 = $2,690. Your family leave credit is $200 per day for up to a maximum of 50 days.

You claim this credit when you file your 2021 taxes.

Sick and Family Leave Tax Credits for Employees Extended to 2021

Prior COVID-19 legislation required employers with less than 500 employees to provide employees impacted by the pandemic with up to 10 days of paid sick leave and 12 weeks paid family medical leave. The criteria and dollar limits were the same as for leave for the self-employed described above.

To help defray the cost, employers could claim a refundable tax credit that they could deduct from the payroll taxes they must pay the IRS throughout the year. This program was mandatory through December 31, 2020 (but businesses with fewer than 50 employees could get an exemption). Employers could voluntarily extend such leave through March 31, 2021.

ARPA extends the rules for sick leave pay and family medical leave pay to April 1, 2021, through September 30, 2021. The cap on family medical leave pay is increased from $10,000 to $12,000.

Employee Retention Credit Extended and Expanded

Previous COVID-19 relief legislation in 2020 created a new refundable employee retention credit designed to encourage employers not to lay off their employees during the pandemic. The credit expires June 30, 2021. ARPA extends and increases the credit for employees paid wages during July 1, 2021 through December 31, 2021. Employers qualify for the credit if they experience either:

  • a full or partial suspension of their business during these months because of government orders limiting commerce, travel, or group meetings due to COVID-19, or
  • a 20% or more decline in gross receipts during a 2021 calendar quarter compared with the same quarter in 2019.

The credit is equal to 70% of wages paid to each employee (up from 50% under the old credit). Wages include health benefits. The maximum credit is $10,000 per employee per quarter. For employers with more than 500 full-time employees in 2019, only wages paid to employees who are not providing services qualify for the credit.

In addition, a special employee retention credit is now available for start-up businesses that don't qualify for the credit under the regular rules. Such businesses qualify for a credit up to $50,000 per quarter if they (1) began after February 15, 2020, and (2) do not earn more than $1 million per year.

Employers can be immediately reimbursed for the credit by deducting the amount of the credit from the employer's portion of the Medicare tax they must pay for each employee (a 1.45% tax on wages). Any remaining credit amount will be paid to the business by the IRS after it files its 2021 tax return.

A business can qualify for this credit if it receives a Paycheck Protection Program (PPP) loan from the Small Business Administration.

Employer-Provided Dependent Care Assistance

Employers can pay their employees a certain amount tax-free each year to help them care for their children and other dependents. Ordinarily, a maximum of $5,000 in tax-free employer-provided dependent care assistance is allowed each year. However, for 2021 only, the limit is increased to $10,500. Your employer will need to amend its employee dependent care assistance plan by the end of 2021 for the new limit to apply.

EIDL Advances Are Tax-Free

Businesses impacted by the COVID-19 pandemic can obtain Economic Injury Disaster Loan grants (EIDL grants) from the Small Business Administration (SBA). These are grants up to $10,000 targeted to businesses in low-income communities. The new law makes these grants tax-free. And you can still deduct business expenses you pay with the grants. You can get more information on EIDLs at the SBA website.

New 1099-K Income Reporting Rules Start In 2022

Right now, if you get paid for goods or services through PayPal or a similar third party settlement organization, or through an online platform like Uber or Airbnb, the payments are not reported to the IRS unless you are paid more than $20,000 during the year and have more than 200 transactions through PayPal or other platform. If you reach this threshold, a Form 1099-K is sent to the IRS reporting the payments. Otherwise, the IRS has no record of them. This leads to underreporting of income and contributes to the “tax gap”—the amount by which Americans underpay their taxes each year.

To help combat such underreporting, starting in 2022, PayPal and similar organizations, and hiring platforms like Uber/Lyft, Upwork and others, will have to file a Form 1099-K whenever a person or company is paid $600 or more for goods or services during the year. For example, Uber will have to file a 1099-K for every driver who is paid $600 or more in 2022 and later. Likewise, Airbnb will have to file a 1099-K for every property owner who earns $600 or more.

This new rule is not a tax increase. But it will increase tax collections by making it harder to hide income from the IRS.

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