The recently enacted Taxpayer Certainty and Disaster Tax Relief Act of 2020 made changes to the employee retention tax credits created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). One of those major changes was extending the Employee Retention Credit (ERC) until June 30, 2021. This allows eligible employers to claim a refundable tax credit against the employer’s share of Social Security tax equivalent to 70% of the qualified wages paid to employees from January 1, 2021 until June 30, 2021. The maximum ERC available is $7,000 per employee per calendar quarter, which equals $14,000 per employee for 2021. Additionally, it provides that employers who were given Payroll Protection Program (PPP) loans are able to claim the ERC for qualified wages that aren’t payroll costs in forgiving the PPP loan.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020 altered the definition of qualified wages. For employers with an average of 500 or less full-time employees in 2019, qualified wages are wages paid to employees when the operation of the company was at least partially suspended, or when there was a decline in gross receipts, regardless of whether the employee provided services. For employers with an average of more than 500 full-time employees in 2019, qualified wages are wages paid to employees who were not providing services when the operation of the company was at least partially suspended or when there was a decline in gross receipts.
Employers may obtain the ERC before they file their employment tax returns by reducing employment tax deposits. Employers with an average of 500 or less full-time employees in 2019 may complete a Form 7200 to request advanced payment. However, if an employer had an average of more than 500 employees in 2019, they are not eligible for the advance.
Employers running their trade or business from January 1, 2021 through June 30, 2021 are eligible if they undergo either:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
- 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%).
If an employer was not in existence in 2019, they may use the corresponding quarter in 2020 as a reference instead. Also, for Quarter 1 and Quarter 2 of 2021, employers may measure the decline using the previous quarter compared to the same quarter in 2019 (2020 Quarter 4 and 2021 Quarter 1, respectively). The IRS will be issuing further instructions on this.