In 2020, the CARES Act created a new concept of tax credit called The Employee Retention Credit. This credit did not get a lot of publicity at the time because it was dwarfed by the Paycheck Protection Program and a pandemic. In December 2020, the Employee Retention Credit (ERC) was extended to June 30, 2021. On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021 (ARPA). ARPA extends the ERC through December 31, 2021.
Wages paid in 2020 and 2021 may potentially qualify for the Employee Retention Credit. Read on to learn how you can claim it. Rules and amounts differ between 2020 and 2021.
What is it?
Eligible companies can claim a credit against actual wages paid during a qualifying quarter and receive a refund or apply for an advance against those wages.
The credit is equal to 50% of qualified wages, including health plan expenses paid in a calendar quarter. The maximum amount of qualifying wages per employee for 2020 is $10,000. Therefore, the maximum amount of credit for 2020 is $5,000 per employee.
The credit is equal to 70% of qualified wages, including health plan expenses, paid in a calendar quarter. The maximum amount of qualifying wages is $10,000 of wages, per employee, per calendar quarter. Therefore, the maximum credit for 2021 is $7,000 per employee, per quarter, or $28,000 for the year if the company is eligible in all four quarters of 2021.
Significant Decline in Gross Receipts
For 2020, the period of significant decline begins with the first calendar quarter in 2020 in which an employer’s Gross Receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The period of significant decline ends with the earlier of: January 1, 2021 or the calendar quarter following the first calendar quarter of significant decline in which the gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.
Translation: Run your P&L for 2020 by quarter and compare to 2019. Include a comparison using percent of change. If one quarter in 2020 is lower than 2019 by 50%, that is the first quarter of significant decline. Review the quarters after that. If any of the 2020 quarters exceeds 80% of same quarter in 2019, that is the end of your significant decline. You may claim the credit for the periods between those two events.
For 2021, things are a little different. Each quarter is measured and qualifies independent of the other quarters. There does not need to be continuity of significant decline. A qualifying quarter in 2021 is determined when an employer’s Gross Receipts are less than 80% of its gross receipts for the same calendar quarter in 2019. Yes, you are still measuring against 2019, unless the company was not in business during those quarters in 2019. Then, measure against 2020.
Alternative quarters may be used for calculation. You may compare the immediate preceding quarter against the corresponding quarter of 2019. For example: the first quarter of 2021 may opt to use the 4th quarter of 2020 compared to the 4th quarter of 2019.
Effectively stated: If your company qualifies for the credit in the 4th quarter of 2020, you also qualify for the first quarter of 2021.
Similarly, the second quarter of 2021 may use the 1st quarter 2021 compared with the 1st quarter of 2019, and so on.
Qualifying wages are largely determined by the number of employees. For 2020, an employer must have fewer than 100 employees, with some exceptions. Operations must have been fully or partially suspended, OR the business must have suffered a significant decline in gross receipts as defined above. If wages were used for PPP loan forgiveness or FFCRA paid family and medical leave, those same wages cannot be used to claim the credit. In 2020, wages claimed under the Work Opportunity Credits do not qualify. The WOC restriction was removed for 2021.
Claiming the Credit
Advance credits may be requested by completing Form 7200 and base your claim on average quarterly wages. This will need to be reconciled on your regular quarterly Form 941.
If you have already filed Form 941 and determine you were eligible for the credit, the best course of action is to file an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund – Form 941-X. (Say that 10 times fast!)
Form 941-X has been updated specifically for the Employee Retention Credit. Completing this form will not affect Forms W-2 or any annual payroll tax returns. It is simply a credit. You may decide to complete this form without involving your payroll service. However, consider contacting a tax professional to help with this. The Worksheets for figuring the refundable and non-refundable credits change each quarter.
Take the time to work through these credits, especially for 2021. Otherwise, you may be leaving a lot of money on Uncle Sam’s table. Whatever fee you will pay either your payroll service or tax preparer will be more than covered by the credit.