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2021 Updates
Please note that a new round of PPP loans and additional small business relief rolled out in early 2021. See all the details here.
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, certain employers (including tax-exempt entities) are eligible for employee retention tax credits (ERC). And with the passing of the American Rescue Plan Act (ARPA), the Employee Retention Credit will now expire on December 31, 2021 (extended from June 30). This gives employers even more incentive to keep employees on their payroll during the COVID-19 outbreak.
Recently updated legislation now allows eligible employers to claim quarterly tax credits of 70% of any wages paid, for up to $10,000 in wages per employee. These tax credits expire on December 31, 2021, so an employer may take up to four quarterly tax credits. That could add up to as much as $28,000 per employee. That’s in addition to the $5,000 per employee retained in 2020, which can be retroactively claimed if newly eligible.
Eligibility for payroll tax credits
To be eligible for these tax credits, a company must meet the following criteria:
- Business operations are partially or fully suspended due to a COVID-19 shutdown order.
— OR —
- Gross receipts declined by more than 20 percent when compared to the same quarter in 2019. Credits apply to subsequent quarters unless gross receipts exceed 80 percent of gross receipts for the same quarter in the prior year.
Also note that a business may now take advantage of both PPP loans and ERC, so long as it does not double dip by claiming a tax credit for any wages paid with the proceeds of a PPP loan that has been forgiven.
How is the credit calculated?
Each quarter, the amount of the credit is 70% of qualifying wages of up to $10,000 per employee. “Qualified wages” include both cash payments and the cost of any employer-provided health care.
Depending on the size of your company, qualifying wages can vary. Note that the size of your company is based on the average number of employees a company had in 2019.
| Company size | 500 or fewer employees | More than 500 employees |
| Qualified wages | All employee wages (up to $10,000 per employee)
The credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit. |
Wages from employees who are not providing services due to circumstances related to COVID-19 (up to $10,000 per employee)
The credit is allowed only for wages paid to employees who did not work during the calendar quarter. |
Retroactively claiming ERC from 2020
If a business did not claim ERC in 2020, they may now do so retroactively under the new legislation. Since companies were not previously permitted to participate in the PPP while claiming ERC, many companies whose PPP loans have been forgiven are newly eligible to claim these tax credits.
Since the credit was 50% in 2020, tax credits may be retroactively claimed for 50% of the wages of each employee, up to $10,000 in wages. That means it may be possible to claim up to $5,000 in ERC per employee. This is the 2020 tax credit maximum for the entire year, while 2021 credits may be claimed quarterly up to December 31, 2021.
How do I receive a credit if my business is eligible?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
For updates and more detail, take a look at the IRS Employee Retention Tax Credit FAQS and find additional, up-to-date information on the IRS Coronavirus page. This article will also be updated as the Treasury Department issues new information and guidelines. For additional information about CARES, FFCRA, and how your business can respond to the COVID-19 outbreak, please visit our COVID-19 Resource Center.
If you have questions about how the CARES Act or FFCRA impacts your business, please consult your legal advisor or tax professional.
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Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.