By now, we all know the Covid-19 pandemic raised many challenges for both employees and employers. Many employers struggled keeping their employees on the payroll amid government ordered shutdowns. Those that were able to hang on to their employees during these tough times are eligible for tax credits. The Employee Retention Credit was rolled out as part of the CARES Act in 2020 and has since been updated and extended through the rest of 2021.
Employers who kept their employees on the payroll during the pandemic can get a refundable tax credit of 70 percent of up to $10,000 for qualified wages paid per employee per quarter. That means so far in 2021, employers can deduct up to $14,000 per employee, and up to $28,000 by the end of the year.
To be eligible for the tax credit, employers must have paid qualified wages between March 12, 2020, and December 31, 2021. There are two ways to fall into tax credit eligibility. Employers qualify if they experienced:
- a full or partial shutdown due to Covid-19 related government orders
- OR -
- a decline in gross receipts of at least 20 percent in a 2021 quarter compared to 2019. If your business did not exist in 2019, you can still qualify by comparing the decline in 2021 the same quarter in 2020.
The shutdown qualification requirement is less stringent than it may seem. The shutdown could be full or partial, and regarding correspondence, travel, or group meetings. The shutdown order could have come from federal, state, or local government, and your business may qualify even if the order was only to limit capacity, hours of operation, or if vendors or suppliers were shut down. There are many possible shutdown scenarios that may qualify your business for the credits. And again, a shutdown is only one way to qualify, your business may still qualify by a quarterly decline in gross receipts.
Both large and small employers are eligible for the credit. If you have more than 500 employees, qualified wages include those paid to employees who were not working due to a full or partial shutdown or gross decline in receipts. For 500 employees or less, qualified wages are those paid during a full or partial shutdown or decline in gross receipts regardless of whether employees were working. The credit also applies to charities and non-profit organizations.
An additional upside to the employee retention credit is it's refundable, meaning if the payroll deposit is negative after the deduction, you will get a refund back from the government. Also, after the latest expansion of the tax credit, it can now be claimed in addition to Payment Protection Program (PPP) loans.
If you are curious at how your company might benefit from this credit, Stock Legal would love to help you understand this tax benefit and even walk you through the application process. It can be a complicated process, but the payoff can result in significant savings after a tough year for many businesses.