Employee Retention Credit Expanded for 2021
If your business was impacted by COVID-19, you may be eligible to receive the Employee Retention Credit. It is a refundable credit that was expanded with the Consolidated Appropriations Act signed into law on December 27, 2020.
To qualify, your business operations must have been either fully or partially suspended by a COVID-19 governmental order, or your gross receipts are 20% lower for a quarter than the same quarter in 2019. A safe harbor is available for Q1 2021 that allows the use of the previous quarter. In this case, you could use Q4 2020 to Q4 2019 instead of Q1 2021 to Q1 2019.
Qualified wages must have been paid between January 1, 2021 and before July 1, 2021 and should include gross wages plus the employer cost of health insurance. Wages cannot have been paid with PPP loan proceeds. Employers with 500 or fewer employers can use all wages paid to determine the credit, including wages paid to those working as well as those who are not working. However, for employers with more than 500 employees, only the wages of those NOT providing services because of a decline in business can be included (so, only for employees not working).
The credit is 70% of qualified wages plus the cost of health benefits provided to the employee. The credit cap is $7,000 per employee for the first two quarters of 2021. Businesses that received the $5,000 maximum credit for wages paid for an employee under the 2020 credit may still receive the 2021 credit.
Example : your receipts declined by 20% for Q1 2021 vs. Q1 2019. You are eligible to take the credit. Employee earns $10,000 from 1/1/21 through 3/31/21. The credit for 1st Quarter is 10,000 x 70% = $7,000 credit.
To claim the credit, you may reduce your employment tax deposits and reflect the reduced deposits on Form 941, or (for small employers with less than 500 employees) apply for an advance by filing Form 7200 , Advance Payment of Employer Credits Due to COVID-19 .
Keep in mind that there is no double-dipping of credits allowed – employers who take this credit cannot also take a credit for Paid Family Medical Leave on the same qualified wages. Furthermore, if an employee is included for the Work Opportunity Tax Credit, he/she may not also be included for the Employee Retention Credit. It is important for employers to evaluate which credit is more financially beneficial to their businesses.
