The employee retention credit was created as part of the CARES Act on March 27, 2020. The recent Consolidated Appropriations Act, 2021, which was enacted on December 27, 2020 amended and extended the credit.
Below is a summary of the eligibility and qualifications for the employee retention credit as it was originally passed into law on March 27, 2020.
The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experience a significant decline in gross receipts during the calendar quarter.
The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations.
A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.
The IRS has released FAQs relating to the eligibility and qualifications:
The recently enacted Consolidated Appropriations Act, 2021 amended and extended the employee retention credit:
- The disallowance of claiming the employee retention credit if a company received a Paycheck Protection Program loan was repealed retroactively.
- The credit is extended to include the first two quarters of 2021.
- The significant decline in gross receipts is reduced from 50% to 20% for eligibility
- The credit is increased to 70% of the first $10,000 of qualified wages per employee per quarter
- Expands the ability to claim the credit for wages paid to employees who are still working for employers with more than 100 employees to 500 employees
We are waiting on further guidance from the IRS relating to the 2021 updates and the employee retention credit interplay with the paycheck protection program. We will keep you updated as more information is made available.