On December 27, 2020, The Consolidated Appropriations Act 2021 (CAA) was signed into law. The new law enacted Section 2017 of The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA 2020). This Act extends the COVID-19 employee retention payroll tax credit to include wages paid during the period January 1, 2021 to June 30, 2021 and modifies the credit amount for quarters in 2021.
For wages paid in 2020, the maximum qualified wages taken into account for each employee for all calendar quarters in 2020 is $10,000, resulting in a maximum credit of $5,000 for the year with respect to any employee.
For wages paid in the first and second quarters of 2021, the maximum qualified wages taken into account for each employee is $10,000 for a quarter. The credit amount is 70% of the qualified wages, resulting in a maximum credit of $7,000 per quarter with respect to any employee.
Paycheck Protection Program & Employee Retention Credit
The TCDTRA 2020 provides that an employer that receives a PPP loan may also qualify for the employee retention credit. However, wages paid with PPP loan proceeds that are forgiven are not qualifying wages for purposes of the credit. The TCDREA 2020 provision is retroactively effective on March 12,2020.
Eligibility Requirements
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- Fully or partially suspends operations during any calendar quarter in 2020 or the first or second quarter of 2021 due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19; or
- Experiences a significant decline in gross receipts during the calendar quarter.
Significant Decline in Gross Receipts
For calendar quarters in 2020, a significant decline in gross receipts begins with the first quarter in 2020 that an employer’s gross receipts for a quarter are less than 50% of gross receipts for the same quarter in 2019. The significant decline in gross receipts ends the earlier of January 1, 2021, or the first quarter following the quarter for which the employer’s 2020 gross receipts for that quarter are greater than 80% of its gross receipts for the same quarter during 2019.
For the first and second quarters of 2021, the employer is considered to have a significant decline in receipts if the gross receipts for the 2021 quarter are less than 80% of the gross receipts for the same quarter in 2019. Alternatively, the employer can compare the gross receipts of the immediately preceding quarter to the applicable quarter in 2019. For example, for the first quarter of 2021, an employer is considered to have a significant decline if gross receipts for the first quarter of 2021 are less than 80% of the gross receipts for the first quarter in 2019. Alternatively, if the employer’s gross receipts for the fourth quarter of 2020 are less than the 80% of the gross receipts for the fourth quarter of 2019, the employer is considered to have a significant decline in receipts for the first quarter of 2021.
Claiming the Credit
Employers report total qualified wages and the related COVID-19 employee retention payroll tax credit on Form 941 for the quarter in which the qualified wages are paid (except for qualified wages paid in March 2020). The credit is allowed against the employer portion of social security taxes (6.2% rate) on all wages and compensation paid to all employees for the quarter. If the amount of the credit exceeds the employer portion of these federal employment taxes, then the excess is treated as an overpayment and refunded to the employer. If the employment tax deposits are not enough to cover the anticipated credit amount, the employer can file Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request advance payment of the remaining credit amount.
Note: If you are claiming a credit for 2020 you must file an amended 941 (941X).
Does your business qualify?
If you think your company may be eligible for the employee retention credit, contact us and we can help to see if you can take advantage of 2020 and 2021 credits.
