Tax Credit for Employers

In addition to PPP loans and stimulus checks, the Federal Government is providing additional financial relief to those businesses that were directly impacted by COVID-19 shut down orders in the form of a fully refundable tax credit. The Employee Retention Credit under the CARES Act encourages businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

What is the ERC?

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.

For 2021, the credit is equal to 70 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid during the first three quarters of 2021, with the second quarter ending September 30, 2021. The maximum amount of qualified wages taken into account with respect to each employee for each quarter is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $7,000 per quarter, or $21,000 total, unless further credits are approved.

Who is an Eligible Employer?

Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

• Fully or partially suspended operation during any calendar quarter in 2020 or the first two calendar quarters 2021 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• Experienced a significant decline in gross receipts during the calendar quarter.  A significant decline in gross receipts has been defined for 2020 as a 50% reduction in gross receipts in a quarter as compared to the same quarter in 2019.  An Employer that meets the gross receipts test remains eligible until such time as the reduction in gross receipts is less than 80% compared to the same quarter in 2019.  For 2021 a significant decline in gross receipts has been defined as a 20% decline as compared to the same quarter in 2019.

What are qualified wages?

Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in section 3231(e) of the Code) paid by an Eligible Employer to some or all employees after March 12, 2020, and before January 1, 2021.  Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.

The definition of qualified wages depends, in part, on the average number of full-time employees (as defined in section 4980H of the Code) employed by the Eligible Employer during 2019.

If the Eligible Employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.  For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship described in (1) or (2) above. 

If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

PPP Loan Interplay

Businesses that received a paycheck protection program (“PPP”) loan can also qualify for the credit.  However, qualified wages that were paid for out of the PPP loan cannot be counted towards the qualified wages.  In other words, wages paid in excess of the forgiven PPP loan are eligible to be counted towards “qualified wages”.

Next Steps

Tyler Law can help your business determine if it is eligible to apply for the employee retention credit.  Prior to filing anything with the IRS, Tyler Law does recommend also seeking the advice of a qualified and knowledgeable CPA or tax professional to ensure the forms are properly filled out and the wages properly calculated.