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The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit 

Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:

  1. The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19.
  2. A significant decline in gross receipts.

A significant decline in gross receipts begins:

  • On the first day of the first calendar quarter of 2020
  • For which an employer’s gross receipts are less than 50% of its gross receipts
  • For the same calendar quarter in 2019.

The significant decline in gross receipts ends:

  • On the first day of the first calendar quarter following the calendar quarter
  • In which gross receipts are more than of 80% of its gross receipts
  • For the same calendar quarter in 2019.

Employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid.

Most employers, including tax exempt organizations, can qualify for the credit. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:

  1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.

Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.

  • Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
  • Businesses shuttered but able to continue their operations largely intact through telephone.

Employee retention credits are being extended into 2021. The revenue reduction requirement is now lower and businesses that received a PPP loan are now eligible to apply. Every pay period, you withhold a certain amount of an employee’s earnings called qualified wages. This money is for federal unemployment tax which is reported on IRS Form 940, IRS Form 941, or Form 944. Payroll tax credits—like the Employee Retention Credit—let you keep some of this money by reducing the federal taxes you have to pay.

If your tax credit exceeds the amount of tax you’re required to pay, you can get a check in the mail for the difference. The Employee Retention Credit (ERC) provides immediate cash-flow relief to eligible companies impacted by the COVID-19 pandemic. Such cash-flow relief comes in the form of a refundable employment tax credit, up to $5,000 per impacted employee.

There are no shortage of tax law changes in the bill, but one section in particular requires attention sooner than others; Section 206, which allows businesses to retroactively both borrow a PPP loan and claim an Employee Retention Credit for 2020. As part of the CARES Act passed in March of 2020, Congress created two mutually exclusive incentives that would provide funds to business owners designed to allow them to keep employees on staff throughout the pandemic.

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