Business Relief: The Employee Retention Credit Extended

Employers are seeing some much needed relief now that the the Employee Retention Credit has been extended. The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit for 2020 to help businesses. The credit helps employers retain their workers by keeping them employed during the COVID-19 crisis. As part of the Consolidated Appropriations Act, 2021 (CCA), the credit has been extended through June 2021.

What is the Employee Retention Credit?

The credit is a government-sponsored program to keep workers employed. It’s funded by providing qualifying employers with a refundable credit against certain employment taxes. The credit is equal to 70% (up from 50% prior to 2021) of the qualified wages that an eligible employer paid to employees between March and July. Specifically between the time periods of March 12, 2020, and before July 1, 2021. (Before this extension, the credit ended on December 31, 2020.)

The IRS is offering help if the employer’s employment tax deposits are insufficient to cover the credit. The employer may get an advance payment from the IRS by filing Form 7200. This form is for Advance of Employer Credits Due to COVID-19.

For each employee, up to $10,000 in wages (including certain health-plan costs) per quarter (versus $10,000 per year in 2020) can be counted to determine the amount of the 70% credit.

Employee Retention Credit Extension Eligibility

Employers are eligible for the 2021 credit if they operated a business between Jan 1 2021, and June 30, 2021. However, they must experience either:

the full or partial suspension of the operation of their trade or business during any calendar quarter. The suspension must be due because of governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
a significant decline in gross receipts. A significant decline in gross receipts means the following; when the gross receipts for a quarter are less than 80% of its gross receipts for the same calendar quarter in 2019.

If the business didn’t exist at the beginning of the same calendar quarter in calendar year 2019, substitute “2019” for “2020.”
Employers, by election, can apply the gross-receipts test by using the immediately preceding calendar quarter.

How Does The Employee Retention Credit Work?

The credit applies to qualified wages paid during this period.

What are Qualified Wages in Regards to the Employee Retention Credit?

Qualified Wages

The definition of qualified wages depends on how many employees an eligible employer has.

For the 2021 credit

If an employer averaged more than 500 full-time employees during 2019; qualified wages are the wages paid to employees during that quarter who were not providing services because they were laid off or furloughed.

If an employer averaged 500 or fewer full-time employees during 2019; qualified wages are wages paid to any employee during the quarter when operations were suspended or for which the decline in gross receipts applies, regardless of whether its employees were providing services.

The rules for claiming credits based on the payment of “qualified health plan” expenses for eligible employees are retroactive to March 23, 2020. If, additional credits are due to an employer for prior calendar quarters, then one can claim those credits by filing IRS Form 941.

Impacts of Other Credit and Relief Provisions

An employer’s ability to claim the Employee Retention Credit can be impacted by other relief provisions. For example:

If an employer received a Small Business Interruption Loan under the Paycheck Protection Program, then the employer was not eligible for the Employee Retention Credit in 2020. However, the CCA changed this rule. Retroactive to March 23, 2020, borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, if an eligible employee’s wage is used to substantiate the forgiveness of a PPP loan, those same wages cannot also be used to claim the Employee Retention Credit.
Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA. (AKA: Families First Coronavirus Response Act.)
Wages can’t be counted toward the credit for paid family and medical leave.
If the employer is allowed a Work Opportunity Tax Credit, employees don’t count.

Claiming the Employee Retention Credit

There are a few rules to claim the new version of the Employee Retention Credit. Eligible employers must report their total qualified wages and related health-insurance costs each quarter on their quarterly employment tax returns. (This will be Form 941 for most employers.) The credit is taken against the employer’s share of Social Security tax. However, the excess is refundable under normal procedures.

Questions about whether or how this credit might apply to your business? Please give this office a call at 360-778-2901. Or you can read more about the Interaction of PPP loans and the Employee Retention Credit on a earlier blog.