For businesses that have been severely impacted by COVID-19, an employer tax credit was provided under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), called the Employee Retention Credit. The purpose of the Employee Retention Credit is to encourage businesses to keep employees on their payroll during these challenging times.
For 2020, the Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages considered for each employee is $10,000 for all calendar quarters, with a maximum credit of $5,000.
This high-level summary of the qualifications and the process for claiming the credit can help you determine if you qualify.
Who is an Eligible Employer?
As defined under the CARES Act, an eligible employer is any employer that carried on a trade or business during calendar year 2020 and met either of the following criteria during any calendar quarter in 2020:
– The operation of the trade or business was fully or partially suspended due to government orders limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.
– The employer had a significant decline in gross receipts for the quarter as compared to the comparable quarter in 2019.
To qualify as having a significant decline in gross receipts for 2020, the business must demonstrate its gross receipts for the calendar quarter were less than 50 percent of the gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the calendar quarter that follows the first calendar quarter after which the business’s quarterly gross receipts are greater than 80 percent of the gross receipts for the same calendar quarter in 2019.
What are Qualified Wages?
Qualified wages generally mean wages as defined in section 3121(a) of the Internal Revenue Code and compensation as defined in section 3231(e) of the Code. Qualified wages also include amounts paid by an eligible employer to provide and maintain a group health plan as provided in the CARES Act, but only to the extent those amounts are excluded from employees’ gross income (per section 106(a) of the Code).
How Do I Claim the Credit?
For most employers, the total qualified wages and the related health insurance costs for each quarter are reported on Form 941. The credit is taken against your share of Social Security tax, and any excess is refundable.
You can also retain the corresponding amount of employment tax deposited in anticipation of the credit and submit a Form 7200 to request an advance on the credit.
It’s Already 2021. Can I Still Claim the Credit for 2020?
If you’re unable to claim for the credit in the previous periods, you can file a Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) to request a refund. Generally, you must file this form within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.
Is the Credit Still Available for 2021?
Yes, it is. The IRS extended the credit to wages paid after December 31, 2020 and before July 1, 2021 and modified the credit calculation. For 2021, the significant decline in gross receipts is based on an 80 percent threshold for each calendar quarter, the qualified wage limit for any calendar quarter is $10,000, and the credit is equal to 70 percent of qualified wages, allowing a maximum credit of $7,000 for each employee for the first and second quarter of the year. These limits continue to apply in the third and fourth calendar quarters in 2021, but with a separate credit limit applying to “recovery startup businesses.”
What is a Recovery Startup Business?
Section 3134 of the Code adds a third category of employers that are eligible for the Employee Retention Credit for the third and fourth calendar quarters of 2021: recovery startup businesses. The IRS defines a recovery startup business as one that began carrying on any trade or business after February 15, 2020, has average annual gross receipts less than $1 million for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined, and is not otherwise an eligible employer (because it doesn’t qualify based on either full or partial suspension of operations or a decline in gross receipts). The Employee Retention Credit for a recovery startup business can’t exceed $50,000 for each of the third and fourth calendar quarters of 2021.
How Does the Credit Interact with the PPP Loan?
Even if your business received a Paycheck Protection Program (PPP) loan, you may be eligible for the Employee Retention Credit. However, qualified wages used in the credit are excluded from the payroll costs during the covered period that qualify for forgiveness under the PPP.
We’d Love to Help!
Scrubbed can help you determine if you qualify for the Employee Retention Credit, complete the necessary forms, and infuse funds back into your business’s cash flow. Contact us at [email protected] or 800-837-5160!