Everything to Know About the Employee Retention Credit for Businesses

The employee retention credit was created to incentivize businesses to retain employees throughout the pandemic, but what is this tax credit and what does it mean for your business?

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When the coronavirus first began impacting the global economy, world leaders took steps to try and mitigate the damage the virus would do to businesses and workers. In the United States, the first of these relief efforts came in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020.

Among other provisions, the CARES Act introduced COVID-19 related employee retention tax credits. Since then, two more laws have expanded and extended the deadlines for businesses qualifying and applying for the employee retention credit, while making amendments for who can qualify, and how.

What is the Employee Retention Credit?

The employee retention credit is a refundable tax credit for qualified businesses, equivalent to 50 percent of qualified wages (defined as up to $10,000 per employee annually, i.e. a tax credit of $5,000 per employee). Originally, this tax credit applied to all qualified wages paid from March 12, 2020, until December 31, 2020.

Under the original provision, an eligible employer was defined as any business owner running a non-government trade or business that either had to fully or partially suspend operation due to appropriate governmental orders, or any business that experienced a significant decline in a quarter’s gross receipts, as per the IRS’ definition (less than 50 percent of the gross receipts for the same calendar year of 2019).

The goal behind the employee retention credit was simple – to incentivize keeping employees on the company payroll despite taking heavy losses, either due to the virus’ impact on the economy, or due to direct intervention and limits implemented by local or federal government authorities to halt the spread of COVID-19.

Changes Made to the Employee Retention Credit

We are well into the second half of 2021 now, so it only stands to reason that the employee retention credit was extended. And so, it was – not only once, but twice, first with the Consolidated Appropriations Act, and again with the new American Rescue Plan Act, both of which were enacted in 2021.

The first significant change to be aware of is that the deadline has been extended to December 31, 2021, as of the American Rescue Plan Act. The credit remains available to all qualified employers who have had business significantly impacted by a government order, or who have not recovered to at least 80 percent of pre-COVID levels.

The second significant change is that the Consolidated Appropriations Act allowed businesses to claim up to 70 percent of qualified wages paid to employees, with a limit of $10,000 per employee per quarter, for the first two quarters of 2021 (maximum tax credit of $7,000 per employee per quarter). It also dropped the requirements for gross receipts to 20 percent less than what they were in the equivalent quarter of 2019 (or the quarter the business was started in, for new businesses), rather than 50 percent.

Then, the American Rescue Plan Act extended the previous amendment throughout all four quarters of 2021 and added a special provision for recovery startup businesses that launched after February 15, 2020, providing a tax credit of up to $50,000 per quarter if the business averaged less than $1 million in gross receipts and did not otherwise qualify for the employee retention credit.

The American Rescue Plan Act also allows businesses to qualify based on a 20 percent drop from the previous calendar quarter, rather than the corresponding quarter in 2019.

Announcements made by the IRS in early August clarified that the tax credit does not apply to qualified wages in connection with a shuttered venue grant under the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, or a restaurant revitalization grant.

Furthermore, employers may exclude from their gross receipts any items pertaining to loan forgiveness for Paycheck Protection Program (PPP) loans, shuttered venue grants, or restaurant revitalization grants.

What Businesses Are Eligible for the Employee Retention Credit?

Any business forced to close due to a government order, or with gross receipts of less than half of the receipts of the same quarter in 2019, is eligible for the employee retention tax credit.

The latter is meant to help businesses that were not forced to close in response to the coronavirus due to their essential status (pharmacies, supermarkets, other critical goods, and material shops) or telework status (tech firms, businesses that operated remotely), yet still suffered massive losses.

Furthermore, as mentioned previously, a special employee retention credit is now also available to qualifying recovery startup businesses under the American Rescue Plan Act. These are startup businesses started on or after February 15, 2020, with less than $1 million annual gross receipts, who are not already eligible under previous requirements. This is a flat tax credit of $50,000 per quarter.

What Are Governmental Orders?

The IRS considers a business to qualify if trade is partially suspended by restrictions enacted by the appropriate government authority, limiting commerce, travel, or group meetings, to such a point that the business cannot operate at full capacity. For more information, visit the IRS’ page on how to determine whether operations can be considered partially suspended due to a governmental order.

What Wages and Compensation Qualify?

Qualified wages are defined as any wages and compensation paid between March 12, 2020, and December 31, 2021, including qualified health plan expenses, in times of economic hardship as described by a suspension in trade, or drastic decline in gross receipts.

Companies with over 100 full-time employees can only count wages paid to employees who are not providing services due to suspension of operations. Smaller companies can count all wages paid during economic hardship, as defined above.

How Do Businesses Apply for the Tax Credit?

Eligible employers must report all total qualified wages and health insurance costs per quarter on Form 941, the employment tax return.

Employers can also use Form 941-X to retroactively file for eligible quarters in which qualified wages were paid.

If a reduction in employment taxes is not enough to cover the full credit, an employer may use Form 7200 to request an advance payment from the IRS to cover the rest.

Employee Retention Credit and PPP Loans

Prior to changes made by subsequent acts, the original CARES Act did not allow employers who had claimed a PPP loan to claim the employee retention credit as well.

Since then, an amendment was made to allow employers to claim the tax credit and the loan, provided that qualified wages are not counted both for the employee retention credit and as payroll costs used to qualify for forgiveness of PPP loans.

If you qualified for both an employee retention credit and a PPP loan, and want to better understand their interaction, consult the IRS’s publication on the matter, and visit a tax professional to review the details of your own company’s situation.

If you are having payroll tax problems, consult our professional tax attorneys today.

What Is the IRS Child Tax Credit 2021 and How Does It Affect Me?

Payments for the new IRS Child Tax Credit are to begin July 15, 2021, but what is this type of credit, how has it changed, and how may it affect you? Will you receive the new Child Tax Credit, or should you opt out?

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While the COVID-19 pandemic continues to decline as vaccination programs pick up around the world, millions of families are still left reeling from the financial and social impact of the virus, which has led to the deaths of over 600,000 Americans, and over 4 million deaths worldwide.

As part of the current administration’s larger $1.9 trillion American Rescue Plan, the IRS has announced that about 39 million American families will be eligible receive up to $1,800 in the form of several monthly checks until December 2021, starting July 15. These payments are being distributed in the form of an expanded IRS Child Tax Credit.

However, there is a caveat to this federal bonus – one that may inspire some families to decline it. First, let’s go over the expanded Child Tax Credit, and how it’s been changed this year.

What is the IRS Child Tax Credit?

What is a tax credit? Tax credits are different from tax refunds, in that they represent money the IRS gives you to write off your taxes. Anything left over after your taxes are paid gets sent your way in the form of a check.

The IRS Child Tax Credit is designed to help low- and middle-income families eligible for the tax credit alleviate some of the financial pressure of growing a family.

Changes made to the Child Tax Credit this year, to help families still affected by COVID, include additional funds (up to $3,600 per child, up from $2,000) as well as a cash advance.

Because payments this year are starting halfway through 2021, half of the new IRS Child Tax Credit will be sent out to bank accounts across the country (hence the $1,800 to be paid out over the next few months), while the other half can be claimed as a tax credit at the end of the 2021 tax year (on your 2021 tax return).

Furthermore, there has been news that the current administration is proposing to extend the monthly cash advance for five more years. Whether or not we’ll hear more on that idea remains to be seen. If the tax credit payments get extended without any major changes, that would mean the entire annual Child Tax Credit would be paid out in monthly chunks.

Potential Downfalls of the Updated IRS Child Tax Credit

The catch? You need to be careful about how much of a tax credit you’re getting. Unlike the stimulus checks, where the government sent you what it sent you, and you were allowed to keep the excess if you received more than you were entitled to, this tax credit is different.

If the amount you receive either in cash or as a tax credit at the end of the year exceeds what you are eligible for based on number of children, filing status, and income, you may need to pay the IRS back what you were overpaid. Whether or not this is subject to change isn’t clear, but the IRS’s current stance is that it is entitled to demand some or all of the excess payments back.

In other words: if you’re entitled to an IRS Child Tax Credit this year, try to be careful about how much you’re entitled to, and be strict with your bookkeeping. Consider working with a tax professional this year.

How Do I Qualify for the Child Tax Credit?

The expanded IRS Child Tax Credit applies per child up to age 17 (as of December 31, 2021). Before the recent changes, it was limited to children up to age 16. The maximum annual tax credit per child was also increased, from $2,000 to $3,600 (for children under age 6) and $3,000 (for children between ages 6 and 17).

Qualifying for the Child Tax Credit is largely a matter of income level and filing status. The annual income thresholds for families currently stands at:

- $75,000 or less for single taxpayers
- $112,500 or less for heads of household
- $150,000 or less for married couples filing a joint return and qualified widows and widowers

If you earn more than that, you may still be able to apply for the enhanced IRS Child Tax Credit, but it will be a lower amount per child, depending on how much more you earn.

Right now, the values are at $50 less per child, per $1,000 of annual income above the threshold. At a certain income level, the enhanced IRS Child Tax Credit is no longer available, but regular the Child Tax Credit may still be taken advantage of up to a higher income level.

If you’re having trouble, the IRS has a qualification tool to help taxpayers figure out their eligibility.

Determining Your Eligibility

To recap what you generally need to be eligible:

- You will have had to have filed a tax return in 2019 or 2020, and must have already claimed the Child Tax Credit on said return; or
- You’ve given your info to the IRS for the Economic Impact Payments of 2020 as a non-filer (you can sign up with that link); and
- You have a place of residence in the United States for more than half a year, or file a joint return with a spouse with a place of residence in the United States for more than half a year; and
- You have one or more children under the age of 18 (as of December 31, 2021) with a valid Social Security Number; and
- You earn less than the cap for the Child Tax Credit.

If this seems confusing, it's because it is. Consider working with a tax professional who can provide tax preparation services and guide you through these requirements.

Should I Have Received a Letter?

Not all, but many taxpayers who are already eligible for an IRS Child Tax Credit will have received a Letter 6416 or 6416-A from the IRS, titled the Advance Child Tax Credit Outreach letter. These were sent out to taxpayers based on their 2019 or 2020 returns.

To recap, under the new expanded IRS Child Tax Credit, the following changes have been made:

- Those eligible for the maximum amount under 2021 rules will receive $250 per month, per child between the ages of 6 and 17, and $300 per month, per child under the age of 6, until the end of 2021.
- Eligibility will include children up to age 17 as of December 31, 2021.
- The other half of the year’s estimated credit will be available as a refundable tax credit on your income tax return, even if you do not file income taxes. However, you will need to file or apply for the credit to receive it.

If you’re wondering about eligibility or how much tax credit you’re qualifying for this year, be sure to speak to a tax professional.