Stimulus bill provides for employee retention tax credit

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The CARES law passed in March 2020 created an “employee retention tax credit,” which gave qualifying employers a refundable tax credit for salaries paid to employees during periods in which the business’s employment. employer was subject to suspension, closure or significant drop in income. The tax credit has not been widely used by employers with fewer than 500 employees, mainly due to the fact that employers receiving Paycheck Protection Program (P3) loans could not take advantage of the credit. On December 27, 2020, the Consolidated Credit Act (LCA) was promulgated. CAA has significantly expanded the use of the employee retention tax credit by allowing employers with P3 loans to take advantage of the credit. In addition, the CAA has increased the amount of the tax credit available. At the same time, these changes make credit an attractive opportunity for employers in 2021 and easier to obtain for eligible salaries paid in 2020.

Credit Eligibility: Under the CAA, employers are entitled to the retention tax credit in two circumstances: (i) the employer’s business has been “totally or partially suspended” due to a government order or (ii) the employer suffered a significant drop in gross revenue.

  • A suspension of activity means that an employer’s activities have been limited in whole or in part due to a government decree that affects commerce or travel. Limits on the number of people who can assemble in one location, or an order reducing the hours a business can stay open, are examples of eligible orders. In particular, if an employer can carry out commercial activities at full distance through teleworking despite the existence of an order affecting the physical presence of the offices, the employer will not be deemed to have suffered an eligible suspension of activities.

  • A significant drop in gross revenue means that an employer experienced a decrease of at least 20% in gross revenue in a calendar quarter in 2021 compared to the same calendar quarter in 2019 (i.e. that gross revenue is 80% or less in the first quarter of 2021 compared to the first quarter of 2019). Alternately, for calendar quarters in 2021, an employer can choose to use the immediately preceding calendar quarter and compare gross revenue to the same quarter in 2019 to determine if the employer qualifies (i.e. employer could compare fourth quarter from 2020 to the fourth quarter of 2019). “Gross revenue” refers to all revenue from sales, services, investments and other internal and external services.

    • To note: For salaries paid during 2020, a decrease in gross revenue had to be 50% or more for a calendar quarter in 2020 compared to the same quarter in 2019. Thus, an employer who otherwise qualified under this standard but could not claim the credit due to the fact that P3 funds can retroactively qualify for a tax credit for calendar quarters in 2020 if they meet the standard of declining gross receipts.

The gross revenue calculation is done quarterly, so if an employer qualifies in a particular quarter, all eligible salaries paid to employees in the quarter are eligible for the credit.

Credit amount: For periods from January 1, 2021, the amount of the tax credit available is 70% of the “eligible salary” per employee for salaries paid until June 30, 2021, up to a limit of $ 10,000 for each employee (ie up to $ 7,000 per employee). That’s more generous than the tax credit available in 2020, which was 50% of eligible salary paid per employee for all quarters (in other words, up to $ 5,000 total per employee).

Eligible salaries: Qualifying salary means cash compensation as well as “qualifying health insurance plan expenses” (both employer and employee portions of premiums paid for group medical coverage).

Time limit : For credits claimed in 2020, salaries must have been paid from March 13, 2020, through December 31, 2020. For credits claimed in 2021, salaries must have been paid from January 1, 2021, through June 30, 2021.

  • For example, if an employer qualifies during the first quarter of 2021 and the second quarter of 2021 and pays an employee $ 10,000 of eligible wages in each quarter, then the employer can claim a tax credit of up to ‘to $ 7,000 in each quarter for that particular employee. Further away, if the employer qualifies in a given quarter in 2020 and pays the same employee $ 10,000 during the quarter, then an additional $ 5,000 in tax credits can be taken for the employee, for a total of $ 19,000.

Limitations based on employee population: For credits available after January 1, 2021, employers with more than 500 employees can only claim a tax credit for salaries paid to employees who do not actively provide services to the employer during a qualifying calendar quarter or period. closing period. For employers with less than 500 employees, a tax credit can be used for employees who receive a salary during a reference period, regardless of whether the employees are actively working for the employer.

  • To note: For 2020, the limit is 100 employees, so employers with more than 100 employees can only claim a credit for employees who do not provide services, and employers with less than 100 employees can claim a credit for any employee, regardless of whether the employee is actively at work. Thus, the rule of the threshold of 500 employees does not “postpone” the salaries paid in 2020.

Other limits: As described above, the significant change in AAC has widened the availability of credit to employers who have received a PPP loan or who will apply for a “graduate” PPP loan. There is a limit to taking credit for salaries paid with PPP funds. Any qualifying salary paid with PDP proceeds that has been canceled (or for which an employer intends to request cancellation) cannot also be used to claim an employee retention tax credit. In other words, there is no “double deduction” on the same salary paid to the same employee.

Claim the credit: Employers claim the credit by offsetting any employment tax withholding applicable to the IRS. Under direct compensation, an employer reports total qualified wages on its federal employment income tax returns (IRS Form 941), which has been amended to include the employee retention tax credits return.

Other changes: Some other notable changes put in place by CAA regarding retention tax credits:

  • Previously, an employer could not claim a tax credit for increases in an employee’s rate of pay made within 30 days of March 13, 2020. This limit on salary increases has been removed for credits claimed after January 1, 2021.

  • Previously, government and tax-exempt entities were not eligible for the credit. For salaries paid after January 1, 2021, these entities can benefit from the tax credit.

Below is a summary of the relevant provisions of the CAA Employee Retention Tax Credit:

March 13, 2020 – December 31, 2020

January 1, 2021 – June 30, 2021

Amount of salary eligible for the retention tax credit

50% of the qualified salary

70% of qualified salary

Maximum loan amount

Limited to $ 10,000 per employee (maximum of $ 5,000 in total)

Limited to $ 10,000 per employee per quarter (maximum of $ 7,000 per employee per quarter, for a maximum total profit of $ 14,000)

Decrease in gross receipts to qualify for credit

50% decrease in the calendar quarter in 2020 compared to the same quarter in 2019

20% decrease in the calendar quarter in 2021 compared to the same quarter in 2019, Where 20% decrease in the previous quarter compared to the same quarter of 2019

Employee threshold for limitation of salary payment

Employers with more than 100 employees can only claim a credit for wages paid to employees who do not provide services

Employers with more than 500 employees can only claim a credit for wages paid to employees who do not provide services


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