How Furloughs Impact Small Business Taxes

When a small business faces an economic downturn or other adverse financial conditions, one option to temporarily reduce its expenditures is to furlough employees. A furlough is different than laying off or terminating an employee; it also has an impact on the small business’s taxes.

Meeting with a small business CPA can help you understand how furloughing will affect your taxes. Here’s what you need to know about furloughing an employee and its potential impact on a small business’s tax liability.

The Specifics of Furloughing an Employee

When you furlough an employee, you stop paying their wages or drastically reduce their compensation and work hours. However, during the time that the employee is furloughed, you typically continue to pay the employee’s benefits. The furloughed individual is still considered an employee of your company.

Furloughs are usually used for short periods of time. They allow small businesses to temporarily lower their expenses while keeping their valued employees on their official payroll list. Once the small business is in a better position financially, it won’t have to go through the entire hiring process to bring the furloughed employees back. 

How Furloughing an Employee Impacts Your Small Business’s Taxes

Thanks to the CARES Act, there’s a provision in place that provides employers with a tax credit to cover a portion of a qualifying employee’s wages. After some initial uncertainty, it was decided that this tax credit could be used to offset the cost of providing health insurance for qualifying furloughed employees. Small businesses can receive a tax credit of up to $5,000 for each eligible employee. This tax credit will reduce the small business’s overall tax liability. 

While this provision was initially set to expire at the end of 2020, the American Rescue Plan Act extended it through the end of 2021. You don’t have to wait until you meet with a small business CPA firm to file your taxes in order to benefit from the credit. 

Instead, you can reduce your quarterly tax payments by reporting your health insurance costs for furloughed employees on your quarterly tax return. Or, you can submit Form 7200 to receive an advance payment for the credit. 

Have more questions about the impact of a furlough on your small business’s taxes? Contact Gurian CPA Firm today!