The employee retention tax credit keeps your employees on the payroll. Employers who lost business and revenue due to COVID-19 may be eligible.
The Consolidated Appropriations Act changes the employee retention tax credit for 2021.
The CARES Act allowed employers to use the credit or the Paycheck Protection Program (PPP). Now, employers may take advantage of both, with certain limitations.
The credit motivates businesses to keep employees on their payroll during COVID-19.
Continue reading to learn more about this tax credit for COVID-19 relief in 2021. Plus, learn how to get professional tax help if you need it.
The government wanted to keep people employed during COVID-19. The tax credit is an incentive to keep employees on the payroll.
The law began under the Coronavirus Aid, Relief, and Economic Security Act (CARES). It is a refundable credit of 50% of qualified wages by an employer that suffered during COVID-19.
Under the new act, significant changes apply. Qualified employers who can take advantage as the coronavirus pandemic continues.
The original rule was for wages paid March 12th, 2020, and before January 1st, 2021.
The new law extends the qualified wages paid to July 1st, 2021. The availability extended two quarters for the beginning of 2021.
Wages subject to FICA taxes and health costs are part of credit eligibility. The goal for the employee tax credit is to reimburse those who are not working.
Wages paid after March 12th, 2020, through June 30th, 2021 qualify.
The IRS includes the pretax wages calculating qualified health expenses.
Before determining which wages qualify, there are definitions for full-time employees and limits.
For instance, a full-time employee works 30 hours per week or 130 hours a month in any month of 2019. Other tips to determine wage qualification include:
The IRS has specific preventions, such as:
Employers must consider which credits to use that will be better for their business.
There are two different criteria due to changes for 2020 and 2021.
The tax credit applies to 50% of qualified wages, $10,000 after March 12th, 2020, to January 1st, 2021.
The tax credit applies 70% to qualified wages up to 10,000 per quarter after January 1st, 2021. Employers can receive $14,000 max per employee through June 30th.
The tax credit is refundable and allowed against an employer’s Social Security taxes.
The government receives a refund if the employer obtains excess credits.
You may use Form 941 to adjust the number of credits every quarter.
This tax credit is a refundable tax credit against payroll taxes reported quarterly.
Your company receives credits by taking out deposits of payroll taxes. These are usually withheld from employee wages.
Use Form 941 to report wages and related health insurance costs for each quarter. Begin with the second quarter of 2020.
You may receive a payment in advance by submitting Form 7200 to the IRS.
Most businesses may qualify for the credit, including tax-exempt organizations.
Two primary qualifications for eligibility requirements include:
For the tax credit, a trade or business means making a profit with regularity and continuity.
It is the same definition as Section 162 of the Internal Revenue Code from the IRS.
“Significant decline in gross receipts” starts in the first quarter of 2020. The decline in gross receipts is less than 50% of its 2019 gross receipts for the same calendar year.
The decline ends when gross receipts are greater than 80% for the same calendar quarter in 2019.
The 2020 and 2021 first calendar quarters also apply to the 80% decline.
Employers affected by COVID-19 closures are most eligible. Businesses must experience a 20% drop in gross receipts compared to 2019 for the same quarter.
Two types of companies generally do not qualify:
If you are a new business, you can use the gross receipts of the quarter you began since there are no 2019 references.
If you are unsure if you qualify for the employee retention tax credit, contact a tax expert today.
Unfortunately, self-employed individuals cannot take advantage of the tax credit towards their earnings.
If they hire other individuals in their business or trade, they may qualify. Because this may be a gray area, is it essential to consult a tax expert.
The federal government is not qualified for the tax credit.
This includes State, local, or political subdivision. Entities that are “instrumentality” towards the federal government are also not eligible.
The IRS considers an organization “instrumentality” to the government with these six factors:
Starting January 1st, 2021, state or local colleges providing health care may qualify. Also, organizations chartered by Congress, such as Federal Credit Unions or Fannie Mae.
A tribal government is eligible for the employee retention tax credit.
The IRS uses Section 162 to determine trade or business operation eligibility. Tribal operations are not subject to income tax.
Yet, tribal government or entities are exempt from Section 162.
The IRS uses different rules to determine if a tribal government carries a trade or business.
For the tax credit, the IRS will consider all activities of the tribal government or entity.
The IRS will treat it as though it involves a business or trade.
Tribal governments receive this exemption, while others fall under Section 162 IRS code.
Employers in US territories may be eligible for the employee retention tax credit.
The CARES Act defines eligible wages for the tax credit using FICA. Qualified wages from employers in US territories are subject to FICA.
As a result, US territories may apply for the employee retention tax credit.
Household employers do not meet the criteria under the IRS Code as a business or trade operation. Thus, they are not eligible for the tax credit.
Household employers hire others for housework, such as housekeeping, babysitting, and others.
Those who pay employment taxes from another business operation may be eligible.
The qualified wages must come from a trade or business, reported on Form 941 or annual tax return.
Under the CARES Act, those who received PPP loans were not eligible for the tax credit.
This rule extended towards another company with 50% ownership that received the loan.
Under the new law, a company that receives a PPP loan may apply.
The wages claimed do not go towards the proceeds that the PPP loan covers. This is double-dipping, which is not allowed.
Under the new rules, the change is retroactive for wages paid after March 12th, 2020. You can file a changed employment tax return to claim the credit.
You may also file an amended employment tax return if you are an affiliate of a PPP recipient.
The new law allows partnered companies to file for credit. Wages paid after March 12th, 2020, are eligible as qualified wages.
Under the CARES Act, advanced payments were not allowed.
Under the new law, the Treasury allows advanced payments for 500 or fewer employees. The basis they will use is the 70% average quarterly payroll for the same 2019 quarter.
If the credit amount after the quarter is less than the advance payment, the business must refund it.
Before, pay increases were not allowed.
Now, pay rate increases may apply. This includes credit for hazardous duty pay increases, amongst others.
There are significant differences between the two laws. Each has different qualifications for the employee tax credit.
Some of these changes include:
The newly signed law offers more flexibility compared to the CARES Act. Businesses can get relief during the pandemic and continue paying employees.
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We answer common questions about the employee retention tax credit.
Businesses who cannot operate due to COVID-19. Essential or remote work is not eligible.
The max limit is 500 employees under the Consolidated Appropriations Act.
For 2020, the max is 50% qualified wages at $10,000. For 2021, the first two quarters are 70% qualified wages, max $14,000. About $7,000 per quarter at the start of 2021 applies.
Under CARES Act, March 12th, 2020 through January 1st, 2021. Under Consolidated Appropriations Act, qualified wages extend before July 1st, 2021.
The new law provides more for businesses and an extended period for qualified wages. Also, PPP loan recipients may now apply for the tax credit. The max credit amount increased from 50% to 70%.