COVID-19 Tax Credits: The Employee Retention Credit and other credits to discuss with your tax professional

With the passing of this last tax season, many of us (likely all of us at Zeroed-In) will try to forget about taxes for the next 8 months until we have to go through year-end filings again. And to be clear, Zeroed-In is not a tax consulting firm nor do we claim to be tax experts; however, it’s worth compiling information on some of the tax relief available for businesses in 2020 and 2021 as a result of COVID-19.

While the topic of Employee Retention Credits (ERC) may be considered old news, we have heard from a few of our clients that they had only considered the ERC for 2020 and not 2021. So, we wanted to share some high-level information on ERC in case there are other businesses who may not have been aware of the changes to ERC for 2021.

You may also be thinking, “2021 is already over. Isn’t it too late to claim the ERC for my business?” The simple answer is no. We have included some information below as it relates to filing amended quarterly tax returns to still obtain the credit.

What is ERC, and how much is the credit?

The Employee Retention Credit was originally created for exactly what it sounds like; to encourage business to keep employees on their payroll. This refundable tax credit was initially created as part of the CARES act of March 2020, and then was amended and extended to 2021 under the Relief Act of 2021.

2020 Credit – Under the CARES Act, the amount of the credit is 50% of qualifying wages paid up to $10,000 in total per employee. Therefore, the maximum credit in 2020 is $5,000 per employee. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit.

2021 Credit – Under the Relief Act of 2021, the amount of the credit is 70% of qualifying wages paid up to $10,000 per calendar quarter per employee. Therefore, the maximum credit in 2021 is $7,000 per employee/per quarter (excluding fourth quarter), or $21,000 per employee for all of 2021. Originally, wages paid after January 1, 2021, and before January 1, 2022, were eligible for the credit. However, the Infrastructure Act terminated the employee retention credit for all employers who are not considered “recovery startup businesses” for the fourth quarter of 2021.

As you can see, that’s quite a significant jump in the maximum credit amount from 2020 to 2021. $5,000 maximum per employee for all of 2020, compared to $7,000 maximum per employee, per quarter for 2021 (with the exception to Q4’21 as mentioned above and explained further below).

Who qualifies?

Taken directly from the IRS website:

“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 suspend operations during any calendar quarter in 2020 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

• Experience a significant decline in gross receipts during the calendar quarter.”
  

If you’re wondering what a “significant decline in gross receipts” means, it is applicable for quarters in 2020 beginning when gross receipts (i.e., revenues/sales) were less than 50% from the same quarter in 2019, and ends when those gross receipts are greater than 80% of the same quarter in 2019. For 2021, it applies to quarters where gross receipts are less than 80% of the same quarter in 2019.

While the above “Eligible Employers” excerpt includes only 2020 and not 2021, the Relief Act of 2021 does extend this same description to 2021. To summarize, an update made specifically to the fourth quarter of 2021, only employers that are considered “recovery startup businesses” can claim the employee retention credit in the fourth quarter of 2021. See further information about that update here.

How do I apply for the credit?

At this point, if you have not previously claimed the credit on your quarterly Form 941 filing or through the IRS’s Advance Payment of Employer Credits (Form 7200), then you will have to file a Form 941-X as an amendment to a previous quarterly filing of form 941. Form 7200 is no longer available, the deadline was January 31, 2022.

Any other credits to consider?

In addition to the ERC, the following tax acts were passed: Families First Coronavirus Response Act (FFCRA), the Tax Relief Act of 2020 (the Tax Relief Act), and the American Rescue Plan Act (ARPA).

These acts allow eligible employers to claim tax credits for wages paid for certain leave taken by employees. This leave relates to the COVID-19 pandemic in which an employee had recovery from an injury, disability, illness, or condition related to receiving a vaccination. This also includes wages for employees that were in isolation or under quarantine or seeking medical diagnosis for COVID-19, as well as extending this to cover time off taken as it relates to an employees’ family that experienced these events.

The eligible periods for employers and when they can claim these credits are from April 1, 2020 through March 31, 2021 under the FFCRA and the Tax Relief Act. Under the ARPA, this period is extended from April 1, 2021 through September 30, 2021. The calculations of qualifying wages for the credits and the related credit limits are a little more involved, so we suggest you inquire with our tax expert and review this helpful IRS comparison chart, found here.

Lastly, we wanted to include references to all this information as we are only providing a high-level summary and are not tax experts.

https://www.irs.gov/coronavirus/employer-tax-credits

https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart

https://www.irs.gov/pub/irs-drop/n-21-20.pdf

https://www.irs.gov/pub/irs-drop/n-21-23.pdf

https://www.irs.gov/pub/irs-drop/n-21-49.pdf

https://www.irs.gov/pub/irs-drop/n-21-65.pdf

https://www.irs.gov/newsroom/employer-tax-credits-for-employee-paid-leave-due-to-covid-19

https://www.irs.gov/newsroom/paid-sick-and-family-leave-credit-2020-vs-2021-comparison-chart

DISCLAIMER: We are not a professional tax firm and we do not consider Zeroed-In, or ourselves individually, to be a tax advisory firm or tax advisors. The content of this article is not intended to be used as tax advice. Please consult your tax professional before taking any action or to obtain further information.

By Matt Moschetti, Manager with Zeroed-In Consulting