On March 1, 2021, the IRS released Notice 2021-20 to provide further guidance on the Employee Retention Credit (ERC) for qualifying wages paid during 2020 (paid after March 12, 2020). This IRS Notice does not address questions that continue to linger regarding the 2021 credit (for wages paid Jan 1 through June 30, 2021). The IRS will likely be issuing future guidance to address those questions.
To assist our nonprofit clients, Altruic Advisors has compiled some helpful information on the ERC, which includes the Notice 2021-20 guidance. Specifically, the IRS has clarified how and when employers who received a PPP loan during 2020 can also claim the ERC for 2020, and what is required to substantiate the claim for the credit. This IRS Notice also clarifies who are defined as eligible employers, what constitutes full or partial suspension of trade or business operations, and what were qualified wages during 2020. For organizations that experienced a loss of revenue and support during 2020 - and have experienced similar losses continuing into 2021 - we highly encourage you to take advantage of this credit as the amounts can be very significant.
In addition, on March 9, 2021, the IRS released the finalized version of the 2021 Form 941 and its instructions. Also released are the new Form 941 Worksheet as well as updated instructions for Schedule B and Schedule R that accompany Form 941. Please note this as you consider the 2021 ERC for your organization.
Employee Retention Credit (ERC)
Refundable credit created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27, 2020
Credit is against the Employer portion of Social Security tax (6.2%) paid during the last part of Q1, and all of Q2, Q3, and Q4 of 2020
Credit was extended through June 30, 2021 by the Consolidated Appropriations Act (CAA), signed into law on Dec 27, 2020
Under the CARES Act, PPP loan recipients were prohibited from receiving the ERC. The CAA clarifies that PPP loan recipients (either 1st round or 2nd round) may now retroactively claim the credit for 2020.
2020 Employee Retention Credit
Refundable tax equal to 50% of qualified wages (see definition below), and certain health plan costs, that an eligible employer pays to employees after March 12, 2020 and before January 1, 2021
Maximum eligible wages and qualified health plan expenses are $10,000 per employee; maximum credit is $5,000 per employee
Immediate access to credit by reducing employment tax deposits. While the credit is only for the employer portion of Social Security tax, immediate access can be obtained by reducing all Form 941 payments (ER/EE Social Security tax, ER/EE Medicare tax, federal withholding tax); Form 941-X is filed to claim a refund of previous qualifying amounts paid. Form 941-X must be filed within three years of the date Form 941 was filed or two years from the date the Form 941 tax was paid, whichever is later.
Advance payments available if reducing tax deposits is not sufficient to cover the credit or in lieu of reducing tax deposits (IRS Notice 2020-22) – Form 7200, Advance of Employer Credits Due to COVID-19 (use the March 2020 version of this form)
Qualifications for the 2020 ERC:
Employer is in business during 2020; and
Experience full or partial suspension of operations due to governmental orders; or
A significant decline in gross receipts
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
Significant decline in gross receipts ends:
on the first day of the first calendar quarter following the calendar quarter
in which an employer’s gross receipts are more than 80% of its gross receipts
for the same calendar quarter in 2019
2021 Employee Retention Credit
Refundable tax equal to 70% of qualified wages (see definition below), and certain health plan costs, that an eligible employer pays to employees after December 31, 2020 and before July 1, 2021
Maximum eligible wages and qualified health plan expenses for Q1 and Q2 of 2021 are $20,000 per employee; maximum credit is $14,000 per employee
Immediate access to credit by reducing employment tax deposits. While the credit is only for the employer portion of Social Security tax, immediate access can be obtained by reducing all Form 941 payments (ER/EE Social Security tax, ER/EE Medicare tax, federal withholding tax)
Advance payments available if reducing tax deposits is not sufficient to cover the credit or in lieu of reducing tax deposits (IRS Notice 2020-22) – Form 7200, Advance of Employer Credits Due to COVID-19 (use the January 2021 version of this form)
Qualifications for the 2021 ERC:
Employer is in business during 2021; and
Experience full or partial suspension of operations due to governmental orders; or
A significant decline in gross receipts
Significant decline in gross receipts begins:
on the first day of the first calendar quarter of 2021
for which an employer’s gross receipts are less than 20% of its gross receipts
for the same calendar quarter in 2019 (not 2020)
Significant decline in gross receipts ends:
on the first day of the first calendar quarter following the calendar quarter
in which an employer’s gross receipts are more than 80% of its gross receipts
for the same calendar quarter in 2019 (not 2020)
Definitions
Qualified Wages
If an employer averaged more than 100 full-time employees during 2019:
(Increased to more than 500 full-time employees during the period 1/1/21 – 6/30/21)
Qualified wages are generally those wages, including certain health care costs (up to $10,000 per employee for 2020 wages paid after March 12, 2020; up to $10,000 per employee for each of the first two quarters of 2021), paid to employees who are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. (This 30-day restriction is eliminated for 2021, which allows for bonus or severance pay to be included as qualified wages.)
If an employer averaged 100 or fewer full-time employees during 2019:
(Increased to 500 or fewer full-time employees during the period 1/1/21 – 6/30/21)
Qualified wages are those wages, including health care costs (up to $10,000 per employee for 2020 wages paid after March 12, 2020; up to $10,000 per employee for each of the first two quarters of 2021), paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.
Restrictions on qualified wages:
Cannot use wages paid with PPP loan funds (participation in the PPP loan program initially disqualified employers from the ERC; this disqualification has been removed)
Cannot use wages for which an employer received a tax credit for Paid Sick and Family Leave under the Families First Coronavirus Response Act (see below)
Cannot use wages covered under the Paid Family and Medical Leave (Code Section 45S, see below)
Cannot use wages covered under the Work Opportunity Tax Credit (Code Section 51)
Qualified Health Plan Expenses
Amounts paid or incurred by the Eligible Employer to provide and maintain a group health plan (as defined in section 5000(b)(1) of the Internal Revenue Code), but only to the extent that those amounts are excluded from the gross income of employees
Must be allocable to the hours for which the employees receive qualified wages
Gross Receipts (For Nonprofits)
Gifts, grants, contributions
Dues and assessments
Sales (product or service), net of returns and allowances
Investment income, rents, and royalties
Any UBTI
Tax Credits for Paid Sick and Family Leave (FFCRA Credits)
Created under the Families First Coronavirus Response Act (FFCRA) passed in March 2020, amended by the COVID-related Tax Relief Act of 2020, enacted December 27, 2020
Employers with fewer than 500 employees are eligible
Employees may receive up to 80 hours of paid sick leave for their own health needs or family member needs if they are unable to work or telework
Employees may also receive up to an additional ten weeks of paid family leave to care for a child whose school or place of care is closed due to COVID-19 precautions if they are unable to work or telework
These are refundable tax credits and are based on actual paid leave, plus Medicare tax on the leave wages, plus any associated employer-paid health plan expenses:
Paid sick leave for employee: up to $511 per day, per employee, for two weeks (80 hrs)
Paid sick leave for employee caring for a family member, paid at 2/3 of employee’s regular rate of pay: up to $200 per day, per employee, for two weeks
Family leave tax credit due to COVID-19 related closure of school or care center, paid at 2/3 of employee’s regular pay: up to $200 per day, for ten weeks
Advance payments available if reducing tax deposits is not sufficient to cover the credit or in lieu of reducing tax deposits – Form 7200, Advance of Employer Credits Due to COVID-19
Initial period was April 1, 2020 through December 31, 2020; this has been extended by the Tax Relief Act of 2020 through the period ending March 31, 2021.
New Form 941 now includes specific fields for the qualified sick and family leave wages (lines 5a(i) and 5a(ii)).
New Form 941-X now contains the FFCRA credit amounts (lines 9, 10, 28, and 29). Form 941-X is used to file an adjusted quarterly payroll tax return to claim FFCRA credits. Form 941-X must be filed within three years of the date Form 941 was filed or two years from the date the Form 941 tax was paid, whichever is later.
Tax Credits for Paid Family and Medical Leave (FMLA Credit)
Created under Code Section 45S for pay periods beginning after December 31, 2017, now extended through March 31, 2021
Employers must have a written policy in place that provides at least two weeks of paid family and medical leave annually; paid leave cannot be less than 50% of the wages normally paid to that employee
Employee must be employed for more than one year
Employee leave must be for one or more of the following reasons:
Birth of a child
Adoption/foster care placement of a child
Care for a spouse, child, or parent who has a serious health condition
Serious health condition makes the employee unable to perform the functions of her or his position
Call or order for active duty in the Armed Forces
Care for a service member who is the employee’s spouse, child, parent, or next of kin
Credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The percentage starts at 12.5% and reaches a maximum rate at 25%.
Credit is claimed by filing Form 8994, Employer Credit for Paid Family and Medical Leave and Form 3800, General Business Credit.
Work Opportunity Tax Credit (WOTC)
Tax credit created in 1996 by the Small Business Job Protection Act
Incentivizes employers to hire those who have consistently experienced substantial barriers to employment
Targeted groups include TANF recipients, SNAP recipients, veterans, those living in empowerment and enterprise zones, ex-felons, SSI recipients
Tax credit can be as much as $9,600 per qualifying hire
WOTC now extended through 2025
As of February 10, 2021, a bipartisan group of Senators introduced legislation to make the WOTC a permanent part of the Tax Code
Credit claimed by first filing Form 8850, Pre-Screening Notice and Certification Request within 28 days after an eligible employee begins work, then by filing Form 5884-C to claim a credit against the employer’s share of Social Security tax