Can You Still Take These 7 Pandemic Tax Credits?

We’re headed toward the end of the second tax year of the pandemic, and several rounds of laws and code changes made in 2021 make filing more complicated for small businesses. However, there’s good news: many of these changes included tax credits and reduced liability. 

Here’s the status on the pandemic tax relief that you may still be eligible for. 

Employee Retention Credit

Small businesses that kept employees on payroll since the pandemic are probably eligible for the Employee Retention Credit, or ERC. First introduced as part of the CARES Act relief package, the ERC is an incentive for businesses to retain their staff. Importantly, businesses can apply for ERC retroactively for 2020 as well as 2021. Even small businesses that received Payment Protection Program (PPP) loans are eligible.

Year	Max per employee	How the ERC is calculated
2020	up to $5k per employee	50% of first $10,000 in wages per employee
2021	up to $21k per employee	70% of first $10,000 in wages per employee (Q1, Q2, Q3
TOTAL	up to $26k per employee

For 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee, amounting to a maximum of $5,000 per worker. You can claim this retroactively using IRS Form 941-X.

For the first 3 fiscal quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This maxes out at $21,000 per employee. Employers that kept staff on through 2020 and 2021 can get a total tax credit of $26,000 per worker.

To be eligible for the ERC, a business has to have been impacted by government lockdowns due to the pandemic or experienced a significant loss in business. Interested small business owners can check their eligibility status and claim the ERC on IRS Form 941.

Paid Sick and Family Leave Credit for Employees

Small businesses that provided paid sick leave for employees in 2021 are likely eligible for a credit from the IRS, although it depends when the sick leave was taken. A series of laws—including the Families First Coronavirus Response Act, passed in March 2020, and the American Rescue Plan Act (ARP Act), passed a year later—allow small businesses to take a tax credit for covering eligible employees’ sick and family leave.

The ARP also allows for small businesses to take the credit if they provided paid time off for eligible employees related to getting or recovering from COVID-19 vaccinations.

Understanding the timing for this particular credit is important, though—and tricky. The credit is calculated differently if the paid time off was provided before March 31, 2021. Overall, paid time off credits are available as long as the time off was taken before September 30, 2021. After September, the tax credit expired.

The credits can vary depending on whether an employee was sick themselves, caring for family members, watching children due to school closures, or taking time off for the vaccine and subsequent recovery period. This information from the IRS shows which paid sick time credits cover particular situations. These credits for paid sick and family leave can be claimed on Form 941.

Self-Employed Paid Sick Leave Credit

Self-employed individuals who couldn’t work for a period of time due to COVID-19 sickness or who were taking care of family members can also claim paid sick time as a credit. This credit is equal to sick leave wages for up to 2 weeks (80 hours), capped at $511 per day and $5,110 in total.  

Just like the previous credit, the self-employed sick leave had to be taken before September 30, 2021. A smaller credit can be taken if a self-employed person took time off to care for a family member. The IRS has published these rules that show who’s eligible to claim it.

Increased Earned Income Tax Credit

The ARP Act significantly raised the Earned Income Tax Credit (EITC) and made it available to both regular workers and self-employed people. Taxpayers with no qualifying children are eligible for $1,502. With 1 qualifying child, taxpayers can claim $3,618, 2 children makes taxpayers eligible for $5,980, and 3 or more make them eligible for a $6,728 credit. For comparison, a single taxpayer with no children could only receive $529 in EITC for tax year 2019.

Qualification is based on the taxpayer’s total income and number of children. As a starting point, single taxpayers with no children must have an income of $21,430 or less. The income requirement maxes out at $57,414 for married taxpayers filing together with 3 or more children. Most tax preparation apps and software will walk filers through eligibility criteria for Earned Income Tax Credits, although this IRS guide provides more information.

Expanded Child Tax Credit

Along with the EITC, the ARP also increased the child tax credit for working families. Many parents received advance payments, but those who haven’t can still receive it when filing 2021 taxes. In 2021, the ARP allowed families to claim a credit of $3,600 per child under the age of 6 and $3,000 per child from ages 6 through 17. Previously, the child tax credit was $2,000 per child ages 16 or younger and it will return to this for the 2022 tax season.

Starting in July 2021, while the expanded child tax credit was active, parents would receive advance payments in the form of a monthly check, unless they opted out or gave direct deposit information. The remainder of the credit is what needs to be claimed this tax period. If a taxpayer received the wrong amount in advanced child tax credits, this will be amended on their 2021 tax return. 

State and Local Small Business Tax Credits

Beyond the IRS, many states and cities are offering 2021 tax credits for small businesses, although these might vary based on industry and how severely eligible businesses were impacted by the pandemic. State tax authorities will have to understand eligibility requirements.

Forgiven PPP Loans Aren’t Taxed … In Some States

Small businesses that took out PPP loans and fulfilled the requirements for forgiveness should note that the IRS does not count these forgiven loans as income. However, some states do consider forgiven PPP loans as income under certain conditions. While most states are following the same guidelines they used for 2020 taxes, there are a few notable exceptions for 2021—Utah, for example, altered its guidelines for taxes on PPP loan forgiveness. State tax authorities will have the most updated information on taxes related to PPP loan forgiveness.

Simplify and Track Your Tax Credits for Free with Sunrise

Small businesses spend an estimated 2.5 billion hours each year on tax compliance. Apps including Sunrise by Lendio can reduce the time it takes to track certain credits as well as expenses, payments, and and even estimate your tax liability when tax time rolls around. Learn more about how you can get Sunrise for free for your small business and its tax assist feature, too. 

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.