Employee Retention Credit

By Mei-Feng Moe

Part 2

The recent IRS guidance on early termination of employee retention credit brought a lot of attention from small business owners who weren't aware of this valuable tax credit which became available on March 13, 2020. Many employers asked: “Are we eligible for this credit?” “How do we qualify for the employee retention credit? “Can we still claim this tax credit?”... etc. The most important answer is yes, if your business qualifies for this credit, you may still claim it. But first, below is a brief review of the employee retention credit:

The Coronavirus Aid, Relief and Economic Security Act (also known as the CARES Act) is a $2.2 trillion economic stimulus bill which included a refundable payroll tax credit for eligible employers who paid qualified wages to employees during the pandemic for the period March 13, 2020 through December 31, 2020.

Under the CARES Act, all private employers, including 501(c) non-profit organizations, who fully or partially suspended business operations due to COVID-19 related shut-down orders, or experienced a more than 50% decline in gross revenue when compared to the same quarter in the previous year, may claim the employee retention credit equal to 50% of up to $10,000 wages (per employee) paid when employees were not working due to the shut-down or economic decline. All wages qualified for employers with 100 or fewer employees regardless of employees' work status and the credit is claimed against the employer share of social security tax.

The Consolidated Appropriations Act of 2021 (CAA21) authorized $12 billion in COVID-19 relief funding for community development financial institutions that predominantly serve minority communities. Beginning January 1, 2021, per employee creditable wages were increased from $10,000 for all quarters to $10,000 per quarter and the allowable percentage increased to 70%. The CAA21 reduced the year-over-year gross receipts decline requirement from 50% to 20% (Employers would qualify if revenue is less than 80% of business income for the same quarter in the previous year.) The Act also increased the small employer cutoff from 100 or fewer to 500 or fewer employees.

The American Rescue Plan Act of 2021 (ARPA), also called the COVID-19 Stimulus Package is a $1.9 trillion economic stimulus bill. The ARPA extended the employee retention credit from Jun 30, 2021 to Dec 31, 2021 and also expanded availability of the credit to recovery startup businesses allowing all newly found businesses to receive funds for qualified wages paid. Starting July 1, 2021 employers claim the credit against their share of Medicare tax instead of their share of social security tax.

A “recovery startup business” refers to an employer that began a business after February 15, 2020 with average gross receipts of $1 million or less. This is a new category of eligible employer for the employee retention credit (that is, the employer who does not qualify for the credit because of a shutdown or decline in gross receipts.) All wages paid during a recovery startup quarter are treated as qualified wages and the employee retention credit for a recovery startup business is limited to $50,000 per quarter.

The ARPA also expanded availability of the employee retention credit to certain severely financially stressed employers with gross receipts that are less than 10% of gross receipts in the same calendar quarter in 2019 (or 2020 if the employer was not in existence in 2019.) All wages paid during a quarter in which the employer is severely financially distressed are treated as qualified wages.

The Infrastructure Investment and Jobs Act (IIJA) ended availability of the employer retention credit for wages paid in the fourth calendar quarter of 2021. The credit is not available for wages paid after September 30, 2021 for all businesses other than recovery startup businesses. Recovery startup businesses may claim the credit paid for the fourth quarter 2021 before January 1, 2022.

If your business qualifies for the employee retention credit but you have not claimed the credit for the quarters that qualify, you may amend your previously filed payroll tax returns to claim the credit. Keep in mind that the business ordinary deduction for wages must be reduced by the credit amounts claimed for these same items. Due to timing issues and the number of changes in the law, it could be that when you file an adjusted payroll tax return for quarters for which you have already filed a federal income tax return deducting full amount of wages, you'll need to also amend your income tax to properly reduce the wages deduction by the amount of employee retention credit claimed.