To help offset the impact COVID-19 has had on the economy, the federal government introduced several stimulus measures. Here are the highlights of each and how they'll impact your taxes if you applied for and received one or more. If you're on the fence about applying for one of these relief programs, start by reading the full program rules to better understand which will be the best fit for your business.
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Families First Coronavirus Response Act (FFCRA)
The FFCRA became effective on April 1, 2020, and stayed in effect until Dec. 31, 2020. It included two main provisions, the Emergency Paid Sick Leave Act (EPSLA) and the Paid Expanded Family Medical and Leave Expansion Act (Expanded FMLA), to help businesses cover the costs of providing paid sick and family leave. These provisions were extended through March 31, 2021 in the Consolidated Appropriations Act, 2021.
To qualify for these programs, a business must have 500 or fewer employees. Businesses may qualify for a tax credit to offset paid sick leave if employees are unable to work or unable to telework because they are:
- Subject to a COVID-19 related federal, state, or local quarantine or isolation order
- Advised to self-quarantine due to COVID-19 by a health care provider
- Seeking a medical diagnosis after experiencing COVID-19 related symptoms
The tax credit for this leave is calculated using the lesser of:
- $511 per day
- 100% of average pay at the employee’s regular rate
Other paid sick leave options also exist but at a different pay rate. This type of qualifying leave requires a person to be unable to work because they were:
- Caring for someone impacted by COVID-19 (up to 10 days)
- Caring for a child whose school or child care provider was closed or unavailable due to COVID-19 (up to 50 days)
These leave types qualify for a tax credit of the lesser of $200 per day or 67% of an employee’s average daily income to cover the costs.
To qualify for the 50 days of paid leave for closed schools or child care providers, an employee must have been employed for at least 30 days prior to the leave starting.
To offset these costs, eligible businesses can take tax credits for qualified leave during the eligible period on federal employment tax returns, such as Form 941. This is why these programs are commonly referred to as a payroll tax credit.
Additionally, eligible businesses may claim a tax credit for the following expenses associated with the paid leave:
- Any qualified health plan expenses allocable to the above wages
- The eligible employer's share of Medicare taxes on those wages
One thing businesses can’t include is the employer's share of Social Security taxes. Employers who are eligible for a payroll credit that is greater than their total payroll tax liability can apply for an advance credit using Form 7200.
Coronavirus Aid, Relief and Economic Security (CARES) Act
The CARES Act was signed into law on March 27, 2020. It provided the following benefits. Some of these benefits were modified or extended by the Consolidated Appropriations Act, 2021.
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Economic Injury Disaster Loan (EIDL)
The Economic Injury Disaster Loan (EIDL) offered small businesses an opportunity for financial relief from losses caused by the COVID-19 pandemic. Separate EIDL Advance grants were intended to give small businesses applying for this loan up to $10,000 upfront. The advance didn’t and still doesn’t have to be repaid.
These grants were for all qualified applicants, whether they were approved for the loan or not. In practice, the EIDL grants ended up being $1,000 per employee for up to $10,000 in total. The EIDL Advance program was initially discontinued when it ran out of money but was given additional funds extended through Dec. 31, 2021 or until funds are exhausted by the Consolidated Appropriations Act, 2021.
Grants under the new Targeted EIDL Advance program will be given to qualifying small businesses in low-income communities that have a 30% reduction in gross receipts in any 8-week period from March 2, 2020 through Dec. 31, 2021 when compared to a comparable 8-week period. This program allows you to receive a maximum grant of $10,000 including any funds previously received under the original EIDL program. Only prior applicants can receive the new targeted grants.
These grants were determined to be non-taxable by Congress in the Consolidated Appropriations Act, 2021. The expenses you pay with an EIDL advance are also fully tax deductible for federal taxes.
Paycheck Protection Program (PPP)
The Paycheck Protection Program offers loans to small businesses to keep employees on payroll and cover certain other expenses during the coronavirus pandemic. It had originally closed applications on August 8, 2020, but reopened to applications from certain borrowers and select lenders on Jan. 11, 2021 after the Consolidated Appropriations Act, 2021 provided more funding for the program. The program rolled out to all lenders and borrowers shortly afterward.
The current PPP program is set to close on March 31, 2021. It also allows qualifying employers with 300 or fewer employees that meet other requirements to take out a second PPP loan. Loans are forgivable if certain conditions are met and come with low-interest rates if the loans are not forgiven.
Normally, loans are usually taxable income if they are forgiven. The CARES Act specifically stated any forgiven PPP loan amounts are not included in taxable income. The CARES Act didn't specify whether expenses paid with forgiven loan amounts are tax deductible or not. The IRS had declared that expenses paid with forgiven loan amounts couldn't be deducted.
But, Congress overruled the IRS in the Consolidated Appropriations Act, 2021, and stated that business expenses paid with forgiven PPP loan proceeds may be deducted for federal taxes. This ability to deduct these expenses paid with the non-taxable grant money has not been adopted by all of the states though.
PPP Flexibility Act
The PPP Flexibility Act was signed into law on June 5, 2020. It changed the PPP to make the loans more flexible, extend the time to spend loan proceeds, and make other changes. It also extended the application deadline for the original PPP program before it was restarted in the Consolidated Appropriations Act, 2021.
These changes didn't impact the taxability of loan funds.
Payroll tax deferral
Employers could defer their share of Social Security tax deposits and payments from March 27, 2020, through Dec. 31, 2020. Employers still had to report deferred taxes. They did so on their employer’s tax returns, such as Form 941.
It's important to note that 50% of the eligible deferred amount must be repaid by Dec. 31, 2021. The remaining 50% of the eligible deferred amount must be repaid by Dec. 31, 2022.
Employee retention tax credit
An employee retention tax credit was included in the CARES Act, but businesses that received a PPP loan were not originally eligible to claim this credit. The Consolidated Appropriations Act, 2021, changed this to allow employers to claim this credit even if they received a PPP loan.
Eligible employers must have had a business during the calendar year 2020 that fully or partially suspended operations due to orders from governmental authorities limiting commerce, travel, or group meetings due to COVID-19. It also applied if a business has experienced a significant decline in gross receipts during the calendar quarter, defined as gross receipts of less than 50% of its gross receipts from the same calendar quarter in 2019.
This credit was originally equal to 50% of eligible wages, including qualified health plan expenses, and applied to wages paid starting March 13, 2020, through Dec. 31, 2020. The maximum qualifying wages per employee for 2020 was limited to $10,000, capping the credit at $5,000 per employee.
The Consolidated Appropriations Act, 2021, extended the end date of the credit period to July 1, 2021. It also changed the credit to be available once per quarter in 2021. The calculation method changed to include 70% of wages up to $10,000 per employee per eligible quarter in 2021. This extension and increase of the wage percentage increases the potential credit per employee up to $14,000 in 2021 in addition to the $5,000 from 2020.
This credit can be taken against the employer's share of Social Security taxes. It's a fully refundable credit that can be claimed on Form 941. Form 7200 may be used to request an advance payment of employer credits if the employer's share of Social Security taxes isn't high enough to immediately use the entire credit amount.