Understanding the Employee Retention Credit
The COVID recession isn’t over for everyone. For businesses still struggling to return to 2019 revenue levels, the tax law has a lifeline: a refundable tax credit of up to $7,000 per-employee, per-quarter.
It’s easy to see how $7,000 per quarter, per employee, can add up. For a qualifying company with 50 employees, for example, it could mean as much as $1,400,000 in benefits for 2021.
The Employer retention credit was first enacted as a tax credit of up to $5,000 per employee for 2020. It applies to taxpayers who have had a 50% decline in revenue for a 2020 quarter compared to the same 2019 quarter. As a result of new legislation, only a 20% quarterly 2021 gross receipts decline is required compared to the comparable 2019 quarter, and the maximum credit is increased to $7,000 per quarter.
Businesses that experienced a shutdown or partial suspension of operations by government order due to COVID may also qualify.
This tax credit is obtained on quarterly payroll tax returns. Because it is “refundable,” the IRS will issue employers a check for any amount of the credit in excess of the quarterly payroll taxes.
There are other key enhancements for the credit for 2021:
- The 2020 credit was limited to employers with up to 100 full-time-equivalent employees. That goes up to 500 FTEs in 2021.
- Larger employers with 90% declines in employment for the 3rd or 4th quarters of 2021 compared to the comparable 2019 quarters can qualify regardless of size.
- Some governmental agencies qualify for 2021.
- “Recovery Startup Businesses” which opened after February 15, 2020 and have average gross receipts under $1 million can qualify for the credit without meeting a gross receipts test.
- Employers can use prior quarter gross receipts for measuring qualification for the subsequent 2021 quarter.
To learn more about how your business could benefit from this tax credit, talk to your current business tax advisor. Or contact Elliot Hitt for more information.
Elliot Hitt is a CPA and Partner at Eide Bailly LLP. He has been serving clients for over 11 years in industries including hospitality, retail and family-owned businesses. he provides tax knowledge to S corporations, partnerships and individuals. He also assists business and individual clients in tax planning and return preparation throughout the year and conducts tax research projects as well as communicates current tax developments to clients and staff.