Editorial · February 21, 2021
Employee Retention Credit: Who Can Claim It Now
The employee retention credit lets an eligible employer cut its payroll taxes, or get a refund, for wages it paid during the pandemic. Congress made it larger and easier to claim in December 2020. Many small firms that were shut out last year may now qualify.
What the credit is
Congress created the credit in the CARES Act, signed on March 27, 2020. For wages paid from March 13 to December 31, 2020, it equals 50 percent of qualified wages. Each worker could count up to $10,000 of wages for the whole year, so the most a firm could earn was $5,000 per worker, says the IRS.
The Consolidated Appropriations Act, 2021 became law on December 27, 2020. It extends the credit to wages paid before July 1, 2021. For 2021 it raises the rate to 70 percent. The $10,000 cap now applies to each calendar quarter, not the whole year. That means up to $7,000 per worker per quarter.
Sources: Internal Revenue Service, Employee Retention Credit page (reviewed February 17, 2021), irs.gov; Consolidated Appropriations Act, 2021 (H.R. 133, 116th Congress), sections 206 and 207, congress.gov.
The two ways to qualify
An employer must have run a trade or business, and it must meet one of two tests in the quarter. Tax-exempt groups can qualify too.
The first test is a government shutdown order. If orders about commerce, travel or group meetings due to COVID-19 fully or partly suspended your operations, you pass for that quarter.
The second test is a drop in gross receipts. For 2020, receipts had to fall below 50 percent of the same quarter in 2019. The new law lowers the bar for 2021. Now receipts only need to fall below 80 percent of the same quarter in 2019. That is a drop of more than 20 percent.
You may also pick the quarter before. A firm can compare the prior quarter with the matching 2019 quarter instead. A business that did not exist in 2019 compares against 2020.
Sources: Internal Revenue Service, Employee Retention Credit page (reviewed February 17, 2021), irs.gov; Consolidated Appropriations Act, 2021 (H.R. 133, 116th Congress), sections 206 and 207, congress.gov.
How many workers count
Firm size decides which wages qualify. In 2020, a firm that averaged more than 100 full-time workers in 2019 could count only wages paid to people who were not working. A smaller firm could count all wages.
The new law moves that line to 500 workers for 2021. If you averaged 500 or fewer full-time employees in 2019, you may count wages paid to anyone during the qualifying period, even people who were on the job. Larger firms still count only pay for time not worked.
Sources: Internal Revenue Service, Employee Retention Credit page (reviewed February 17, 2021), irs.gov; Consolidated Appropriations Act, 2021 (H.R. 133, 116th Congress), sections 206 and 207, congress.gov, section 207(e).
Paycheck Protection Program loans
The old rule was harsh. Under the CARES Act, a firm that took a Paycheck Protection Program (PPP) loan could not claim the credit. The IRS page still describes that rule.
The December law fixes it. Firms with PPP loans may now claim the credit, and the change reaches back to the start of the program. There is one catch. The same wages cannot be used twice. Wages counted for the credit cannot also be counted as payroll costs for PPP forgiveness. The law lets an employer choose which wages to leave out of the credit.
Firms that already filed returns may also elect to claim certain earlier wages, such as health plan costs they left out, in the quarter the law took effect. Ask your tax adviser how that applies to you.
Sources: Internal Revenue Service, Employee Retention Credit page (reviewed February 17, 2021), irs.gov; Consolidated Appropriations Act, 2021 (H.R. 133, 116th Congress), sections 206 and 207, congress.gov, section 206.
How to claim it
Employers report qualified wages on their quarterly payroll tax return, which is Form 941 for most firms. They can also keep back payroll tax deposits in advance of the credit. If deposits are too small, the extra is refundable.
Advance payments are narrower in 2021. Only employers with 500 or fewer full-time employees in 2019 may ask for one. The advance is capped at 70 percent of average quarterly wages paid in 2019.
Keep records for every quarter. Note the shutdown orders that hit you, or your gross receipts for each quarter and the comparison quarter. IRS guidance on the 2021 changes was still to come as of this writing, so check irs.gov before you file.
Sources: Internal Revenue Service, Employee Retention Credit page (reviewed February 17, 2021), irs.gov; Consolidated Appropriations Act, 2021 (H.R. 133, 116th Congress), sections 206 and 207, congress.gov, section 207(g).