The COVID recession isn’t over for everyone. For businesses still struggling to return to 2019 revenue levels, the tax law has a lifeline: a refundable tax credit of up to $7,000 per-employee, per-quarter.
It’s easy to see how $7,000 per quarter, per employee, can add up. For a qualifying company with 50 employees, for example, it could mean as much as $1,400,000 in benefits for 2021.
The Employer Retention Credit was first enacted early in 2020 as a tax credit of up to $5,000 per employee for 2020. It applies to taxpayers who have either:
- Had a full or partial suspension of business due to a government order, or
- Had a significant decline in gross receipts.
A significant decline in gross receipts has occurred if there has been a 50% decline in revenue for a 2020 quarter when compared to the same quarter in 2019. As a result of new legislation effective January 1, 2021, the 50% revenue decline requirement was changed to 20%. Again, you compare your gross receipts for each quarter of 2021 to the comparable 2019 quarter. If your gross receipts are down at least 20% for a quarter, you would be eligible for the credit. Also new for 2021 is that the credit can be claimed for each eligible quarter (not just for the year as 2020 was), and the credit has been increased from $5,000 to $7,000 per employee, per quarter.
As mentioned before, businesses that experienced a shutdown or partial suspension of operations by government order due to COVID may also qualify.
This tax credit is obtained on quarterly payroll tax returns, because it is “refundable,” the IRS will issue employers a check for any amount of the credit in excess of the quarterly payroll taxes. If you now determine that you could have claimed this credit but have already filed your quarterly payroll return for that period, you can file amended payroll tax returns for that quarter and still claim it.
There are other key enhancements for the credit for 2021:
- The 2020 credit was limited to employers with up to 100 full-time-equivalent employees. That goes up to 500 FTEs in 2021.
- Larger employers with 90% declines in employment for the 3rd or 4th quarters of 2021 compared to the comparable 2019 quarters can qualify regardless of size.
- Some governmental agencies qualify for 2021.
- “Recovery Startup Businesses” which opened after February 15, 2020 and have average gross receipts under $1 million can qualify for the credit without meeting a gross receipts test.
- Employers can use prior quarter gross receipts for measuring qualification for the subsequent 2021 quarter.
To learn more, contact Tonya Rule at Eide Bailly.