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Employee Retention Tax Credit

Another Federal Government program to help employers through the pandemic by providing a significant payroll tax reduction based on # of employees in a quarter.

Eligibility for 2021:

1)Sales reduction:

-To receive a tax credit based on # of employees in Q1 2021,

must have at least a 20% decrease in sales (same definition of sales as for PPP 2)in either Q4 2020 vs Q4 2019, or Q1 2021 vs Q1 2019.

-To receive a tax credit for Q2 2021, must have at least a 20% decrease in sales in either Q1 2021 vs Q1 2019, or Q2 2021 vs Q2 2019

-To receive a tax credit for Q3 2021, must have at least a 20% decrease in sales in either Q2 2021 vs Q2 2019, or Q3 2021 vs Q3 2019

-To receive a tax credit for Q4 2021, must have at least a 20% decrease in sales in either Q3 2021 vs Q3 2019, or Q4 2021 vs Q4 2019

2)# of employees must be less than 500

3)If donot meet the sales reduction requirement, can also be eligible if company was required to partially or fully suspend operations in 2020 by order of your state or local government.

Tax Credit:

Calculation: Up to $7,000 per employee per quarter based on quarterly gross wages for each employee per quarterly payroll tax Form 941 plus employer paid health care costs (maximum payroll cost of $10,000 at 70%)

Example:  if 20 employees are reported on Form 941 for Q1 2021 that each earn at least 10,000 including health care costs for the quarter, then credit for Q1 2021 is $140,000 ($200,000 x 70%,or 20 x $7,000).

If payroll stayed the same for each quarter in 2021, then thetotal credit for 2021 will be $560,000 ($140,000 x 4 quarters).

How to access the tax credit:

-The credit is a line item on the quarterly payroll tax return Form 941. This credit is refundable and will paid to your company by the IRS.

Or, in anticipation of receiving the credit, you may stop remitting payroll tax deposits in a quarter up to the projected credit amount, therefore $$ will be obtained immediately. Also, any available credit can be applied to the next quarter to allow for stoppage of payroll tax deposits in the next quarter in lieu of waiting for an IRS refund check.

Also, if payroll tax deposits are stopped and there is still a projected quarterly credit available, you can file Form 7200 to receive the credit in advance of filing Form 941.

Other Rules:

-If you acquired a company in 2021, can include acquired company’s sales into the 2019 quarterly sales calculation.

-No double-dipping of wages and health care costs: If $10,000 is used for the quarterly credit calculation, then cannot use the same $10,000 for the PPP2 loan forgivenesscalculation.

Note: it is expected that this limitation will not adversely affect the forgiveness calculation since there are 24 weeks available in the covered forgiveness period with the requirement that at least 60% of the loan amount be used for payroll costs, and supplier costs are now eligible to help fulfill the 40% requirement. Also, wages in 2021 prior to the receipt of thePPP2 loan can be used in full for the credit calculation.

-Covid related sick leave reimbursed by the IRS is excluded from wages for the credit calculation.

Eligibility for 2020:

-Must have a 50% decrease in sales vs 2019 (quarter vs quarter).

-Maximum Credit is $5,000 per employee per year (not per quarter) and calculated at a maximum payroll cost per employee of $10,000 x 50%.

-Can file retroactively by amending Form 941 and filing Form 941-X. Wages submitted for PPP1 loan forgiveness can be modified to take maximum advantage of the creditandloan forgiveness without resubmitting the forgiveness application.

Note: the above rules for 2021 are subject to change upon guidance yet to be released by the  IRS (as of March 22, 2021).