To help trades and businesses retain employees and keep them employed during the COVID-19 crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit for 2020. As part of the Consolidated Appropriations Act, 2021 (CCA), the credit has been extended through December 2021.
The credit is actually a government-sponsored program to keep workers employed and is funded by providing qualifying employers with a refundable credit against certain employment taxes equal to 70% (up from 50% prior to 2021) of the qualified wages that an eligible employer pays to employees after March 12, 2020, and before January 1, 2022. (Before the extension, the credit ended on December 31, 2020.)
Employers, including tax-exempt organizations, are eligible for the 2021 credit if they operate a trade or business during the calendar quarter for which the credit is determined, and experience either:
- the full or partial suspension of the operation of their trade or business during any calendar quarter 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 for 2021 occurs when an employer’s gross receipts for a calendar quarter are less than 80% of its gross receipts for the same calendar quarter in 2019 (in other words, when gross receipts for the 2021 quarter are reduced by more than 20% of the corresponding 2019 quarter’s gross receipts).
- If the business didn’t exist at the beginning of the same calendar quarter in calendar year 2019, substitute “2020” for “2019.”
- Employers, by election, can apply the gross-receipts test by using the immediately preceding calendar quarter. For example, instead of comparing the gross receipts of the first quarter of 2021 with those of the first quarter of 2019, an employer can elect to compare the gross receipts of the fourth quarter of 2020 to the gross receipts from the fourth quarter of 2019.
The credit applies to qualified wages (including certain group health-plan expenses) paid during this period or any calendar quarter when operations were suspended. Eligible health-plan expenses are the amounts paid by the employer to provide and maintain group health-plan coverage, to the extent that the amounts are nontaxable to the employees.
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 (versus 100 for the 2020 credit), qualified wages are generally the wages, including eligible health-care costs (up to $10,000 per employee per quarter) paid during that quarter to employees who were not providing services because they were laid off or furloughed.
If an employer averaged 500 or fewer full-time employees during 2019 (versus 100 for the 2020 credit), qualified wages are wages, including eligible health-care costs (up to $10,000 per employee per quarter), 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, as a result of these changes, additional credits are due to an employer for prior calendar quarters based on the payment of qualified health-plan expenses, then those credits are to be claimed when filing IRS Form 941 for the fourth quarter of 2019.
Impacts of Other Credit and Relief Provisions – An eligible employer's ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program, as authorized under the CARES Act, then the employer was not eligible for the Employee Retention Credit in 2020. However, the CCA changed this rule, retroactive to March 23, 2020, and borrowers of PPP loans are now eligible to claim the Employee Retention Credit. However, to the extent that an eligible employee’s wages are 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 Families First Coronavirus Response Act.
- Wages counted for this credit can't be counted toward the credit for paid family and medical leave.
- Employees are not counted toward this credit if the employer is allowed a Work Opportunity Tax Credit.
Claiming the Credit – In order to claim the new version of the Employee Retention Credit, eligible employers must report their total qualified wages and the related health-insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers. The credit is taken against the employer's share of Social Security tax, but the excess is refundable under normal procedures.
If you have questions about whether or how this credit might apply to your business, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.