Are You Eligible For Employee Retention Tax Credits?

The Employee Retention Tax Credit was created in March 2020 as part of the CARES Act in response to the Coronavirus pandemic that was impacting businesses across the country. The tax credit was expanded in a December relief package (Taxpayer Certainty and Disaster Tax Relief Act of 2020) and then once again in March 2021 when the American Rescue Plan Act was signed.

According to data from the White House, more than 30,000 businesses nationwide have claimed more than $1 billion in employee retention tax credits to date. Despite this number, President Joe Biden continues to encourage businesses to take advantage of this tax credit.

“What we’re finding is that it can be pretty darn significant,” said Tony Nitti, CPA, and partner in RubinBrown’s Tax Services Group. “A lot of businesses can reduce their payroll deposit requirement to next to nothing or even negative numbers, basically where they get a refund back from the federal government.”

Extension of Tax Credit

The tax credit for retaining employees has been extended to June 30, 2021. Per the Internal Revenue Service (IRS) website:

“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, 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 with 500 or fewer full-time employees in 2019 can apply for an advance on the tax credit using Form 7200. Tax credit advances are not available in 2021 for employers with more than 500 full-time employees.

Is Your Company Eligible?

Companies that operate a business or trade between January 1, 2021, and June 30, 2021, are eligible for the employee retention tax credits if one or more of the following scenarios applies:

1. Partial or full suspension of the company’s business or trade due to orders by the government that restrict group meetings, travel, or commerce because of the COVID-19 pandemic;
2. A reduction in gross receipts during a single quarter of 2021 where the decline was 80 percent or less than the gross receipts from the same quarter in 2019 (in order for the company to be eligible for a quarter in 2020, the decline had to be 50 percent or less of the same quarter in 2019).

The IRS changed the definition of qualified wages as of January 1, 2021, to the following:

“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 were 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.”

Any hospitals, universities, and colleges that are tax-exempt are eligible for the employee retention tax credits for 2020 and 2021.

Businesses eligible for the employee retention tax credit should keep all of their paperwork in order to prove eligibility, especially if a government order prevented the business from operating. Businesses should also know that they can still apply for the credit for 2020 even if they have already filed their taxes for that year. In order to receive the credit for 2020 if a return has already been filed, the business simply needs to go back and amend the return filed with the IRS.

Who Isn’t Eligible?

Government entities, state entities, and political subdivisions are not eligible for the employee retention tax credits for 2020. Those who are self-employed are not eligible for the 2020 tax credit but can claim it if they employed others to work for them. You cannot receive the tax credit if any of the following applies:

• Wages you listed as part of the credit that is for paid medical and family leave per 45S of the Internal Revenue Code
• Wages you received a credit for regarding paid sick and family leave using the Families First Coronavirus Response Act
• An employee where you were granted a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code
• Any wages that were paid to certain related people

You are also ineligible for the tax credit if you received any of the following credits:

• Research Activities Credit
• Indian Employment Credit
• Credit for Employer Differential Wage
• Empowerment Zone Employment Credit

Also, any small business that accepts a small business loan is not eligible for the employee retention tax credit.