Employee Retention Credits-What Businesses Should Know

The Coronavirus Aid, Relief, and Economic Security Act, passed on March 27, 2020, provides a refundable tax credit against certain employment taxes equal to 50% of up to $10,000 of qualified wages (including certain health plan costs) that an eligible employee pays to employees after March 12, 2020, and before January 1, 2021.  Thus the maximum credit per year is $5,000 (50% X $10,000) per employee.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, passed on December 27, 2020, expanded and extended the Employee Retention Credit.  For 2021, this refundable credit is increased to 70% of up to $10,000 of qualified wages per quarter (including certain health care plan costs) that an employer pays to employees between January 1, 2021 and September 30, 2021.  The maximum credit per quarter in 2021 is $7,000 (70% X $10,000) per employee.  

The refundable employer retention credit is available to all qualifying employers regardless of size, including tax-exempt organizations. 

2020 Eligibility Criteria:

To qualify for the credit, employers must fall into one of two categories:

1. Business Operations Curtailed: Eligible employers were carrying out a trade or business during 2020, and the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak.
2. Gross Receipts Declined 50%: Eligible employers have gross receipts that are less than 50% of their gross receipts for the same quarter in 2019; employers remain eligible until their gross receipts exceed 80% of their gross receipts for the same 2019 calendar quarter.

However, an employer who secures an SBA Paycheck Protection Loan created by the CARES Act is ineligible for the employer retention credit, as a Paycheck Protection Loan can be forgiven for wages paid during an 8-week period, thereby leading to double dipping on CARES Act benefits if the business tried to use both benefits.

Qualifying wages are based on the average number of a business’s employees in 2019.

• Employers with 100 or fewer employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked. If the employees worked full time and were paid for full-time work, the employer still receives the credit. 
• Employers with more than 100 employees: An employer that had more than 100 employees on average in 2019 is allowed a credit only for wages paid to employees who did not work during the calendar quarter. 

Wages do not include amounts for payroll credits provided for required paid sick leave or required paid sick leave or required paid family leave for which the government is reimbursing the employer.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter of 2020.

2021 Eligibility Criteria:

1. Business Operations Curtailed: Eligible employers were carrying out a trade or business during 2020, and the operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak.
2. Gross Receipts Declined 20%: Eligible employers have gross receipts that are less than 80% of their gross receipts for the same quarter in 2019; employers remain eligible until their gross receipts exceed 80% of their gross receipts for the same 2019 calendar quarter.

Please contact this office with questions or call for a tele-appointment to determine the best course of action for your business.