New Law Extends COVID Tax Credit

Employers who keep workers
on payroll may benefit.

Employers are urged to take advantage of the newly-extended employee retention credit. The credit is designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made some changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The changes include modifying and extending the Employee Retention Credit (ERC) for six months through June 30, 2021. Several of the changes apply only to 2021, while others apply to both 2020 and 2021.

How Does the ERC Work?

As a result of the new legislation, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, and through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter for a total of $14,000 in 2021.

Employers can access the ERC for the 1st and 2nd quarters of 2021 before filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers with more than 500 full-time employees.

How Does My Business Qualify?

Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

A full or partial suspension of the operation of their trade or business during this period because of government orders limiting commerce, travel, or group meetings due to COVID-19.
A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).

What If My Business Did Not Exist in 2019?

Employers who did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

Other Changes

Also, effective January 1, 2021, the definition of qualified wages changed to provide:

For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations are fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

What If I Received a Paycheck Protection Loan?

Retroactive to the March 27, 2020, enactment of the CARES Act, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that are not treated as payroll costs to obtain forgiveness of the PPP loan.