Many qualified businesses are not claiming the 2021 employee retention tax credit (ERC), a pandemic relief measure worth up to $21,000 a year per employee kept on the business’s payroll. Under the Infrastructure Investment and Jobs Act this credit applies to payroll incurred through September 30, 2021, as the law accelerated the original sunset date of December 31, 2021.

For January 1 through September 30, 2021 (2021 credit), an employer can receive 70 percent of the first $10,000 of qualified wages paid per employee in each qualifying quarter. This amount is up from the 50% of qualified wages for wages paid in 2020. The cost of employer-paid health benefits can be considered a part of the qualified wages.

To qualify for the 2021 credit, business owners have to show they were hurt by COVID-19 by providing evidence showing that revenue was down 20% in any one calendar quarter, as compared to the same quarter in 2019; or that their business was nominally affected by the government shutdowns. The credit for 2021 is up to $7,000 per employee per quarter, based on qualifying wages.

In March of this year, the IRS issued additional guidance on how owners of businesses may take the credit, along with posting Frequently Asked Questions. Even though the IRS attempted to simplify the process and the rules, the rules are still very complex, and often confusing to business owners.

For employees with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order, and there is no requirement that the employee is being paid while they are away from work due to a Covid-19 related circumstance.

For employers with over 100 full-time employees, qualified wages are wages paid to employees only when they are not providing services due to Covid-19 related circumstances.

Eligible employers are private-sector businesses and tax-exempt organizations that have experienced
1. A full or partial shutdown of operations as a result of a government order limiting commerce due to Covid-19 during 2020 or 2021.
2. A gross receipts decline of more than 20% during a 2021 calendar quarter when compared to the same quarter in the prior year.
3. Also, a recovery startup business that was launched after February 14, 2020 and has average gross receipts that do not exceed $1 million, may qualify for a reduced credit capped at $50,000 per quarter.

The credit will be applied against an employer’s share of Medicare taxes, rather than Social Security taxes, and excess credits are refundable, or may be used to offset future payroll tax liabilities.

The credit is claimed on a timely filed Form 941, or a Form 941-X. Taxpayers may thus go back to quarters where they qualify for the credit in and amend their returns to make these changes.

The credit calculation can be confusing. If you have any questions, please contact us.