On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act was signed into law, as part of the Consolidated Appropriations Act of 2021. The Act provides further stimulus and support to those affected by the COVID-19 pandemic, and its section 206 permits eligible employers to take the Employee Retention Credit (ERC), even if they have received a Paycheck Protection Program (PPP) loan.
In addition to this, the IRS recently posted instructions explaining how taxpayers who did not get their PPP loan forgiven can claim the employee retention credit when they file their employment tax returns.
Background on the Employee Retention Credit for 2020
Under the CARES Act, eligible employers were entitled to Employee Retention Credit, a refundable payroll tax credit, equal to 50% of the first $10,000 in wages, and certain health plan expenses paid per employee. Employers qualified for the initial Employee Retention Credit under the CARES Act if they:
- had operations suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings for commercial, social, religious, or other purposes due to COVID-19, or
- experienced a reduction in gross receipts of at least 50% when comparing corresponding calendar quarters of 2020 and 2019.
Furthermore, according to the CARES Act, employers could either take a PPP loan or take the Employee Retention Credit. In other words, businesses that took a PPP loan were not eligible for the ERC, but now this restriction has been removed.
However, while the Employee Retention Credit is now retroactively available to PPP borrowers, the employer can claim it only on qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Any wages that could count toward eligibility for the ERC or PPP loan forgiveness can be applied to either of these two programs, but not both.Get all the necessary information to understand collecting, filing, and remitting payroll taxes and ensure compliance with federal and state regulations.
Employee Retention Credit for 2021
With the latest changes, the Employee Retention Credit is expanded from 50 percent to 70 percent of qualified wages, from January 1, 2021, through June 30, 2021. Therefore, the wage limitation is increased from $10,000 per year to $10,000 per quarter, so the maximum credit per employee in 2021 is $14,000. Employers are eligible if they can demonstrate a decline in gross receipts of 20 percent and may use prior quarter gross receipts to determine eligibility.
Additionally, while governmental entities were not eligible for the Employee Retention Credit under the CARES Act, the new Act makes the credits available to state or local run colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.
According to the IRS News Release 2021-21, employers can access the Employee Retention Credit for the first and second quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Employers with an average of 500 or fewer full-time employees in 2019 may request advance payment of the credit on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits.
IRS Guidance for Claiming the Employee Retention Credit
The recent IRS guidance addresses only the situation in which the employer was denied PPP forgiveness. If employers received a PPP loan and included wages paid in the second or third quarter of 2020 as payroll costs to support an application for loan forgiveness, and their request for forgiveness was denied, they can claim the Employee Retention Credit. In this case, employers need to report those qualified wages on the fourth quarter 2020 Form 941, Employer’s Quarterly Federal Tax Return.
The IRS guidance provides a limited 4th quarter procedure by which qualifying Employee Retention Credit wage amounts for the second and third quarters of 2020 can be reported on Line 11c or Line 13d of the original fourth-quarter Form 941. However, the guidance was released on January 22, and Form 941 for the 4th quarter is due by January 31. Accordingly, many employers will need to use Form 941-X to file an amended return or claim for a refund for the quarters ended in June, September, and December of 2020.
Determining Eligibility for the Employee Retention Credit
While this enhanced flexibility could result in substantial savings for businesses, this also creates additional obligations for employers. For example, they need to determine if their company is eligible, identify impacted employees, calculate and document qualified wages, noting the different rules that apply for 2020 and 2021. In addition to this, to ensure compliance, it is necessary to pay attention to other CARES Act provisions and employment tax benefits as well as to meet the procedural requirements to claim the credit.
On the other hand, using tax management software significantly simplifies employers’ obligations and helps them determine eligibility and the tax impact of the Employee Retention Credit and other associated programs. Thus, they can make the proper deductions and keep the tax situation under control while preventing costly mistakes.Outsource payroll taxes to save resources, ensure continued compliance with changing regulations, and focus on projects that add value to your business.