Employee Retention Credit FAQ (2021)


It’s no secret that the Coronavirus pandemic has resulted in economic hardships for many businesses. From full or partial suspensions of operation to restrictions on the amount of people who can enter a business at a time, many businesses need help. That’s why the government has instituted the Employee Retention Credit, to help businesses who are and have been sticking through the pandemic with their employees.

Many of you may not know much other than the basics regarding Employee Retention Credit, but it can be a huge deal for businesses, especially small businesses, that took a hit during the Coronavirus pandemic. Here is everything you need to know to see if you qualify, how much you qualify for, and how to claim your Employee Retention Credit in 2021.

PLEASE NOTE: While we have researched this article extensively, and believe all statements to be accurate, you should still consult with your tax counsel before making any decision.

Q. What Exactly is Employee Retention Credit?

A. Introduced under the CARES Act, Employee Retention Credit is a fully refundable tax credit for employees. This has gone under a few changes, once in the Consolidated Appropriations Act of 2021 and again in the American Rescue Plan Act of 2021. This credit applies per fiscal quarter. This is based off of the qualified income of your employees and is meant for businesses who have been negatively impacted by COVID-19.

Q. How Do I Know If I, As an Employer, Qualify?

A. There are a couple of factors that determine an employers eligibility.

  • Must have between 1-500 W2 employees on staff, not including owners.
  • Must be fully or partially closed due to a governmental order during the fiscal quarter.
  • All-sized businesses are eligible if they started before February 15, 2020. Companies that were started after this date but have less than $1M in gross receipts are eligible as Recovery Startup Businesses.
  • Must have seen a significant decline in gross receipts.

Q. What Counts as a “Governmental Order”?

A. A governmental order constitutes any order, proclamation, or decree from the government at the federal, state, or local level that limits commerce, group meetings, or travel in response to the Coronavirus pandemic. This must affect your business or trade. Limits on hours of operation count as a governmental order.

Q. What Counts as a “Significant Decline in Gross Receipts”?

A. This is one factor that has changed over time. Originally, you had to have a drop of 50% of the total amount of all of your receipts, not adjusted for any expenses or deductible items when comparing the current 2020 quarter with the same quarter in 2019.

With the 2021 changes, that number has moved to a 70% decrease when comparing the current 2021 fiscal quarter with the same quarter in 2019. For new businesses, you are allowed to use your first quarter in lieu of a missing 2019 quarter. Employers do not have to prove that these losses were due to COVID-19.

Q. What is the Maximum Credit I Can Receive?

A. The total amount of credit that can be received is 70% of your qualified wages. There is a cap of $7000 per quarter, meaning a cap of $28,000 per year.

If an employer has more than 500 employees, qualified wages are the wages and health care costs of your employees that are not providing service due to operations being suspended due to COVID-19 or due to the decline in gross receipts. Employers who have this many employees can only count the wages up to the amount that they would have paid in the 30 days prior to the suspending of operation. This is up to $10,000 per employee.

For employers with less than 500 employees, you will once again take into account the wages and health care costs of you employees, with $10,000 per employee, paid during a period of suspended operation or during a period of a decline of gross receipts. The difference is that, for employers with less than 500 employees, it does not matter whether these employees have continued to provide service.

Q. Does Receiving a PPP Loan Disqualify Me From Being Eligible?

A. If you receive a Paycheck Protection Program (PPP) loan you can still qualify for Employee Retention Credit. You cannot use wages that have been forgiven or are expected to be forgiven by your PPP loan for Employee Retention Credit.

Q. Will the Family First Coronavirus Response Act Affect My Qualified Wages?

A. Yes. You will not be able to include any wages in your qualified wages and health insurance payments that you had received a tax credit for under the Families First Coronavirus Response Act for paid sick leave and family leave.

Q. What If an Employee Is Allowed a Work Opportunity Tax Credit?

A. If you have an employee who is receiving a work opportunity tax credit under section 51 of the Internal Revenue Code you cannot use that employee’s wage or health insurance payments to determine your qualified wages.

Q. How is Employee Retention Credit Applied?

A. The Employee Retention Credit is applied to the Social Security amount that you pay for your employees’ taxes. This is an overpayment, meaning it will get refunded back to you after getting subtracted from your share of those Social Security taxes.

Q. Do Any Government Entities Qualify?

A. This is yet another aspect that has changed regarding Employee Retention Credit. While no government entities were eligible in 2020, there are a few that now qualify. Those include:

  • Public schools and public universities.
  • Any organization whose primary goal is to give medical or hospital care.
  • Certain government agencies and instrumentalities; an example being Federal Credit Unions.

Q. How Do I Claim My Employee Retention Credit?

A. You are able to claim these credits when filling out Form 941, Employer’s Quarterly Federal Tax Return. You will have to calculate the qualified wages and health insurance payments and subtract that amount from your deposit. You will see on the form the fields relating to Employee Retention Credit.

For those employers with less than 500 employees in 2019, you can request advance payment of the Employee Retention Credit. All you have to do is fill out and submit Form 7200, Advance Payment of Employee Retention Credits Due to COVID-19.

Don’t fear if you think you missed out on Employee Retention Credit. For those that had already filed their 2020 taxes, you can retroactively claim your tax credits by filling out Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

Summary

As a responsible business owner or payroll manager, you should do all of the research you can to determine the right moves for your company. That means determining your eligibility for tax credits such as the Employee Retention Credit and looking into how you can use it to save money that was lost during the worst of the pandemic.

For most businesses it was an incredibly rough period. Any business owner, especially small business owners, should be proud of themselves and their team for pushing through. There may have been some fiscal struggles as a result, but tax credits like this one are there to help. Make sure you don’t miss out and look into how it can help your business.