Thanks to the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted on December 27, 2020, employers can take advantage of the newly extended employee retention credit, which makes it easier for businesses that kept their employees on the payroll despite challenges associated with COVID-19.
Through the new legislation, eligible employers can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Note that qualified wages are limited to $10,000 per employee, per calendar quarter in 2021, and that the maximum ERC amount available is $7,000 per employee, per calendar quarter, for a total of $14,000 in 2021.
Employers can claim the employee retention credit for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Also, Form 7200 “Advance of Employer Credits Due to Covid-19” is available to employers with 500 or less full-time employees that want to request the advance payment of the credit after reducing deposits (certain restrictions apply). Note that for 2021 advances are not available for employers with 500 or more employees.
Who are “eligible employers”?
Eligible employers are those that operate a trade or business during January 1, 2021, through June 30, 2021, and
Experience a full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
Experience a decline in gross receipts in a calendar quarter in 2021, where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019. To be eligible based on a decline in gross receipts in 2020, the gross receipts were required to be less than 50%.
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. For the 1st and 2nd calendar quarters in 2021, employers may elect, in a manner provided in a future IRS guidance, to measure the decline in their gross receipts using the immediately preceding calendar quarter (ex. the 4th calendar quarter of 2020 and 1st calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
What are “qualified wages”?
For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended, or due to the decline in gross receipts.
For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended, or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
The law now allows employers who received Paycheck Protection Program (PPP) loans to claim the employee retention credit for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.
For more information visit the IRS news release: