Employee Retention Tax Credit
Retroactive to the March 27, 2020, enactment of the CARES Act, the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the employee retention credit (ERC) for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan. The IRS urges employers to take advantage of this newly-extended credit, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.

As a result of the new legislation, more employers are now eligible for this credit in 2021. Qualified employers should also look back to 2020 quarters to determine if amended payroll tax returns should be filed.

Below are some key elements for claiming ERC:

I. To be eligible for 2020 ERC:

One must be engaged in trade or business and meet one of the tests listed below:

  1. Government order test: Business operations are fully or partially suspended due to government order (COVID-19 related), or
  2. Gross receipts test: Business has greater than 50% decline in gross receipts in any calendar quarter in 2020 compared to the same quarter in 2019.

If you pass either test above then you become eligible in the quarter you meet the test.


Definition of Gross Receipts:
Gross receipts = Sales + investment income (interest, dividend, rent, royalties, annuities) - COGS.

Definition of Qualified Wages:
Gross wages subject to social security taxes PLUS allocable group health care benefits (including HDHPs, HRAs, FSAs, NOT including HSAs or QSEHRAs).
(not counting payroll costs used to apply for PPP1 forgiveness or credit already given due to wages applied to FFCRA and FMLA)

2020 Credit = 50% of qualified wages paid on or after 3/13/2020 - 12/31/2020.

Max wages = $10,000 per employee for the year

Max credit = $5,000 per employee for the year

For employers averaging 100 or fewer "FULL TIME EMPLOYEES" in 2019, all qualified wages paid to employees (if one of the eligibility tests is met) count.

For employers averaging more than 100 "FULL TIME EMPLOYEES" in 2019, only count the qualified wages paid to employees not performing services.

Definition of Full Time Employee: Averaged at least 30 hours of service per week or 130 hours of service in a month.


When will your eligibility stop for the 2020 ERC:

Eligibility continues until the first day of the quarter after the quarter that gross receipts rebound to greater than 80% of the gross receipts of the same quarter in 2019, but not later than 1/1/2021.


II. To be eligible for 2021 ERC:

Effective January 1, 2021, employers are eligible if they operate a trade or business during 1/1/2021 through 6/30/2021, and experience either:

  1. Government order test: Business operations are fully or partially suspended due to government order (COVID-19 related), or
  2. Gross receipts test: Business has greater than 20% decline in gross receipts in any calendar quarter in 2021 compared to the same quarter in 2019.

If you pass either test above then you become eligible in the quarter you meet the test.


Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts. 

2021 Credit = 70% of qualified wages paid on or after 1/1/2021 - 6/30/2021.

Max wages = $10,000 per employee per quarter

Max credit = $7,000 per employee per quarter

For employers averaging 500 or fewer "FULL TIME EMPLOYEES" in 2019, all qualified wages paid to employees (if one of the eligibility tests is met) count.

For employers averaging more than 500 "FULL TIME EMPLOYEES" in 2019, only count the qualified wages paid to employees that are not providing services because operations were fully or partially suspended.


III. Interplay of ERC and PPP Loan Forgiveness:

  • Wages claimed for the ERC cannot be used to apply for PPP loan forgiveness
  • Qualified wages include wages paid from 3/13/2020 - 12/31/2020, review the wages paid during the two stub periods before /after the PPP covered period to determine if enough wages to qualify for ERC without affecting the PPP forgiveness calculations.


IV. How to claim the ERC for 2020 and 2021:

  1. Determine the quarter you become eligible
  2. Compare wages and run calculations
  3. Reduce payroll tax deposits for F/W, SS and MC taxes of employees and employer
  4. Claim on 7200 for immediate refund, to be reconciled at the end of the quarter
  5. Claim on Form 941 or 941X- The deadline to file 2020 941X is until 4/15/2024


Please note the IRS is still updating the FAQs and information might be changing. Here is a link to the IRS website: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

Please contact someone on our team if you need any clarification.




As always, we will keep you informed on all the important updates to the PPP as the SBA and the Treasury continue to release new rules and guidance. Please don't hesitate to contact one of us or reach out to our COVID-19 team at covid19@mggcpa.com should you have any questions. Take care and stay safe.


Our 2020-2021 tax planning guide:https://www.webtaxguide.net/MGGCPA/




Disclaimer:
This newsletter is based on interpretation of information available as of January 29, 2021. Your judgement and interpretations of the Act may be necessary. This alert is provided for information purposes only and does not constitute accounting and tax advice. Please contact your MGGGY LLP accountant for additional assistance



CC mgggy newsletter release 2021-03
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