Podcast: Are You Eligible For Employee Retention Tax Credits?
Don’t Leave Money on the Table If You’re Eligible For Tax Credits.
Under the Consolidated Appropriations Act, 2021, the employee retention credit, a provision of the CARES Act, is available through June 30, 2021 to eligible employers who retained employees during the COVID-19 pandemic. The IRS issued guidance in early March for the credit as it relates to qualified wages paid before Dec. 31, 2020.
Changes made by the Consolidated Appropriations Act, 2021 to the employee retention tax credit include:
- Allowing eligible employers to take the credit through June 30 2021 on wants paid to employees they retained through the crisis
- Businesses that received a Paycheck Protection Program (PPP) loan are not eligible for the employee retention tax credits (Note: the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP
On March 1, 2021, the IRS issued Notice 2021-20 that provides guidance for employers claiming the Employee Retention Credit (ERC) for qualified wages paid between March 12, 2020 and before Jan. 1, 2021. Included in the notice is guidance on how employers who received a PPP loan can retroactively claim the employee retention tax credit. The IRS includes three examples (Q&A No. 57) to highlight the process.
The IRS notice 2021-20 includes seven examples (Q&A No. 49) with scenarios of how an employer with a PPP loan determines which wages, if any, are eligible for the tax credit. The amount of wages eligible largely depends on how the qualified wages were reflected on the PPP loan forgiveness application. Qualified wages included in reported payroll costs on the forgiveness application may be utilized in certain conditions where more expenses than necessary were used to justify the loan forgiveness. In these cases, the IRS will take the minimum wage cost necessary when combined with other eligible expenses to justify loan forgiveness.
However, the IRS makes it clear that expenses eligible for PPP forgiveness that were not included in the loan forgiveness application cannot be factored in after the fact. Consequently, it’s important to ensure all eligible expenses are included on PPP loan forgiveness applications in order to maximize the qualified wages available for ERC.
Note: Changes for the credit for the Employee Retention Credit for qualified wages paid after Dec. 31, 2020 will be addressed in future guidance.
What is the Employee Retention Credit?
Employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020.
Employers who qualify in 2021, including PPP recipients, the new law expands the credit and allows them to claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021. So, an employer could claim $7,000 per quarter per employee or $14,000 for 2021.
What Employers Qualify for the Employee Retention Credit?
Most employers, including tax exempt organizations, can qualify for the credit. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
First Factor Test
A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.
- Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
- Businesses shuttered but able to continue their operations largely intact through telework.
However, any of these businesses still may qualify for the credit with the second factor test.
Second Factor Test
An employer that has a significant decline in gross receipts.
- Under the original CARES Act, generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify. They are no longer eligible if in the calendar quarter immediately following their quarter gross receipts exceed 80% compared to the same calendar quarter in 2019.
- Under the new law, beginning in 2021, businesses must be impacted by forced closures or quarantines and have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019.
Employers will use Form 941-X to retroactively file for the applicable quarter(s) in which the qualified wages were paid.
If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not yet in business.
Note: A member of controlled or affiliated service groups are considered a single employer, so they must aggregate their gross receipts to determine when and if they qualify.
The IRS has provided FAQs to flesh-out how the credit works for employers. This guidance is only informational and not legal authority.
MORE INFORMATION AVAILABLE:
Listen to the MyHRBuzz Podcast(link) Episode 10, for a detailed discussion about the on the employee retention tax credit.
Contact MyHRConcierge For Tax Credit Assistance