Congress has passed a new tax Act in 2021 which provides a huge tax gift to employers.
The CARES Act created the Employee Retention Credit (ERC) for 2020 to help businesses keep employees during the COVID-19 crisis.
Now congress has:
- 1. extended the credit through June 2021 as part of the Consolidated Appropriations Act (CCA) of 2021.
- 2. revised CARES to provide qualifying employers with a refundable credit against certain employment taxes equal to 70% (up from 50% prior to 2021) of the qualified wages that an eligible employer pays to employees after March 12, 2020, and before July 1, 2021 (original end date of December 31, 2020.)
- 3. Under the following circumstances, the new legislation makes an employer eligible for the ERC even if they received a PPP loan.
- 4. An eligible employer can claim the ERC on any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness.
- 5. Any wages that could count toward eligibility for the ERC or for PPP loan forgiveness can be applied to either of these two programs but not both.
Employers, including tax-exempt organizations, are eligible for the 2021 credit if they operate a business between January 1, 2021, and June 30, 2021, and experience either:
- 1. A Significant Decline in GROSS receipts for 2021, defined as receipts for a calendar quarter less than 80% of its receipts for the same calendar quarter in 2019.
- 2. full or partial suspension of the operation of their business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
- Companies can also elect to apply the gross-receipts test using the immediately preceding calendar quarter. For example, instead of comparing gross receipts of the first quarter of 2021 with that of the first quarter of 2019, you can elect to compare the gross receipts of the first quarter of 2020 to the gross receipts from the fourth quarter of 2019.
- Business that did not exist at the beginning of the same calendar quarter in the calendar year 2019, can substitute “2020” for “2019.”
The credit applies to “Qualified Wages” as further defined below, paid during this period or any calendar quarter when operations were suspended. Eligible health-plan expenses are the amounts paid by the employer to provide and maintain group health-plan coverage, to the extent that the amounts are nontaxable to the employees.
Qualified Wages – The definition of qualified wages depends on the number of employees an eligible employer has. For the 2021 credit, if an employer averaged more than 500 full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are generally the wages, including eligible health-care costs (up to $10,000 per employee per quarter) paid during that quarter to employees who were not providing services because they were laid off or furloughed.
If an employer averaged 500 or fewer full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are wages, including eligible health-care costs (up to $10,000 per employee per quarter), paid to any employee during the quarter when operations were suspended or for which the decline in gross receipts applies, regardless of whether its employees were providing services.
The rules for claiming credits based on the payment of “qualified health plan” expenses for eligible employees are retroactive to March 23, 2020. If, as a result of these changes, additional credits are due to an employer for prior calendar quarters based on the payment of qualified health-plan expenses, then those credits are to be claimed when filing IRS Form 941 for the fourth quarter of 2019.
If the employer’s employment tax deposits are insufficient to cover the credit, you may get an advance payment from the IRS by filing Form 7200, Advance of Employer Credits Due to COVID-19. For each employee, up to $10,000 in wages (including certain health-plan costs) per quarter (versus $10,000 per year in 2020) can be counted to determine the amount of the 70% credit.
An eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- Under the old CARES act, an employer that received a Small Business Interruption Loan under the Paycheck Protection Program was ineligible to receive the Employee Retention Credit in 2020. However, the CCA changed this rule, retroactive to March 23, 2020, and borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, eligible employee’s wages used to substantiate the forgiveness of a PPP loan, cannot also be used to claim the Employee Retention Credit.
- Employees are not counted toward this credit if the employer is allowed a Work Opportunity Tax Credit.
- Wages counted for this credit cannot be counted toward the credit for paid family and medical leave.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
Claiming the Credit – To claim the new version of the Employee Retention Credit, eligible employers must report their total qualified wages and the related health-insurance costs for each quarter on their quarterly employment tax returns. The credit is taken against the employer’s share of Social Security tax, and the excess is refundable under normal procedures.
If you are unsure if you qualify or have questions about how these credits apply to you, please call us at 516-482-7777 to discuss your specific situation.