Employee Retention Credits Expanded - claimed on Payroll Tax Returns
A revised Employee Retention Credit (ERC) was included in the Consolidated Appropriations Act of 2021 (CAA 2021) which was signed in December of 2020.
Eligible employers are allowed a retroactive credit against 2020 employment taxes equal to 50% of qualified wages (up to $10,000) for each employee. The credit is also available for certain employers in 2021.
For employers with 100 or fewer employees, all wages paid after March 12, 2020 qualify for the credit.
For employers with more than 100 employees, wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts.
Businesses are eligible if either of these requirements are met:
- They were fully or partially suspended due to an order from a governmental authority limiting travel, business and meetings during the quarter of payroll not paid out of PPP funds,
- The business had a reduction in gross receipts of 50% or more during a calendar quarter compared to the same calendar quarter in 2019.
How to Claim the Credit
Qualifying entities can claim credits from prior quarters of 2020 on their payroll tax returns for the 4th quarter of 2020.
Please check with your payroll provider for information on how to take advantage of this credit.
Interaction with PPP Loan Funds
According to the Journal of Accountancy, "CAA 2021 amended the CARES Act to allow employers that received a PPP loan to retroactively claim the ERC for wages paid after March 12, 2020, but not for the wages used to obtain PPP loan forgiveness." (Author's note: So there needs to be a separate allocation of funds for this purpose.)
"However, it is unclear how the reporting of wages as payroll costs on a previously filed PPP loan forgiveness application affects an employer’s ability to claim the ERC for wages that were included on a loan forgiveness application but did not affect the amount of loan forgiveness."
Eligible employers can now 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.
Employers can access the ERC for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.
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 that did not exist 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.
New Wage Definition for This Purpose
Effective January 1, 2021, the definition of qualified wages was changed to provide:
- 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.
Note : Updated 2/3/2021 based on info from the IRS here.