The Employee Retention Tax Credit, originally part of the CARES Act, has been extended through the Taxpayer Certainty and Disaster Tax Relief Act (part of the Continuing Appropriations Act). Changes made apply to both 2020 and 2021.
Eligible employers may claim a refundable tax credit of 70% on the first $10,000 of wages paid per employee quarter for Q1 and Q2 of 2021. This is a refundable tax credit against the federal payroll taxes reported on Federal Form 941. Employers claiming the credit may reduce their federal tax deposits by the amount of the credit.
Employers are eligible if they experience 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%). Since businesses will not know their gross receipts during the quarter, the gross receipts test may be applied to the immediately preceding quarter.
In addition, effective January 1, 2021, the definitions of qualified wages have changed as follows:
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages generally refer to wages paid to all employees during a period that operations were fully or partially suspended; or during the quarter in which the employer experienced a decline in gross receipts regardless of whether the employees are providing services.
- 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.
Qualified wages or health insurance premiums used to calculate the credit are not deductible on the business tax return to the extent of the credit.
Retroactive to March 27, 2020 (the enactment of the CARES Act), the law now allows employers that obtained a PPP loan to claim the ERTC for qualified wages which not originally treated as payroll costs in order to qualify for loan forgiveness. There were no other changes applicable to 2020 and no definitive guidance on how to retroactively claim the credit for Q1-Q4 of 2020. The gross receipts test was a reduction of more than 50%, the tax credit was 50% of qualified wages and the $10,000 cap was a yearly cap.
Claims for Q1 2021 must be submitted by March 26, 2021 in order to receive an immediate credit. Please contact your payroll specialist if you are eligible to receive the ERTC or have any other questions.