The IRS is urging employers to take advantage of the newly-extended employee retention credit or ERC – which makes it easier for businesses that have kept employees on the payroll despite challenges presented by COVID-19.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) made changes to the employee retention credits enacted under the CARES Act, including extending the ERC for six months through June 30, 2021. While some of the modifcations apply only to 2021, others apply to both 2020 and 2021.
ERC for 2021
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. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, for a total of $14,000 in 2021.
For the 1st and 2nd quarters of 2021, employers can access the ERC by reducing employment tax deposits prior to filing employment tax returns. Small employers (those with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for larger employers.
Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:
- 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
- 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 not in operation in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect (in a manner provided in future IRS guidance) to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
In addition, effective January 1, 2021, the definition of qualified wages was changed:
Employers averaging more than 500 full-time employees in 2019: qualified wages are generally those paid to employees that are not providing services because operations were fully or partially suspended, or due to the decline in gross receipts.
Employers averaging 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.
ERC for 2020
The IRS issued guidance on March 1, 2021 in Notice 2021-20 for employers claiming the employee retention credit for calendar quarters in 2020 under the CARES Act, as modifed by the Relief Act.
For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before January 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50 percent of qualified wages paid, including qualified health plan expenses, for up to $10,000 per employee in 2020. The maximum credit available for each employee is $5,000 in 2020.
A significant change for 2020 made by the Relief Act permits eligible employers that received a Paycheck Protection Program or PPP loan to claim the employee retention credit, although the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit. Notice 2021-20 explains when and how employers that received a PPP loan can claim the employee retention credit for 2020.
The Notice also provides answers to questions such as: who are eligible employers; what constitutes full or partial suspension of trade or business operations; what is a significant decline in gross receipts; how much is the maximum amount of an eligible employer’s employee retention credit; what are qualified wages; how does an eligible employer claim the employee retention credit; and how does an eligible employer substantiate the claim for the credit.