Update from the IRS Newswire: New law extends COVID tax credit for employers

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Update from the IRS Newswire: New law extends COVID tax credit for employers

From the IRS Newswire:
UPDATE

JAN 27, 2021

New law extends COVID​ tax credit for employers who keep workers on payroll​
WASHINGTON — The Internal Revenue Service urges​ employers to take advantage of the newly-extended​ employee retention credit, designed to make it easier​ for businesses that, despite challenges posed by COVID-19,​ choose to keep their employees on the payroll.


The Taxpayer Certainty and Disaster Tax Relief Act​ of 2020, enacted Dec. 27, 2020, made a number of changes​ to the employee retention tax credits previously made​ available under the Coronavirus Aid, Relief, and Economic​ Security Act (CARES Act), including modifying and​ extending the Employee Retention Credit (ERC), for​ six months through June 30, 2021. Several of the changes​ apply only to 2021, while others apply to both 2020​ and 2021.

As a result of the new legislation, ​eligible employers can now claim a refundable tax​ credit against the employer share of Social Security​ tax equal to 70% of the qualified wages they pay to​ employees after Dec. 31, 2020, through June 30, 2021. ​Qualified wages are limited to $10,000 per employee​ per calendar quarter in 2021. Thus, the maximum ERC​ amount available is $7,000 per employee per calendar​ quarter, for a total of $14,000 in 2021.

Employers​ can access the ERC for the 1st and 2nd quarters of​ 2021 prior to filing their employment tax returns​ by reducing employment tax deposits. Small employers​ (i.e., employers with an average of 500 or fewer full-time​ employees in 2019) may request advance payment of​ the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after​ reducing deposits. In 2021, advances are not available​ for employers larger than this.

Effective Jan.​ 1, 2021, employers are eligible if they operate a​ trade or business during Jan. 1, 2021, through June​ 30, 2021, and experience either:


1. A full or partial​ suspension of the operation of their trade or business​ during this period because of governmental orders​ limiting commerce, travel or group meetings due to​ COVID-19, or


2. A decline in gross receipts in​ a calendar quarter in 2021 where the gross receipts​ of that calendar quarter are less than 80% of the​ gross receipts in the same calendar quarter in 2019​ (to be eligible based on a decline in gross receipts​ in 2020 the gross receipts were required to be less​ than 50%).

Employers that did not exist in​ 2019 can use the corresponding quarter in 2020 to​ measure the decline in their gross receipts. In addition, ​for the first and second calendar quarters in 2021,​ employers may elect in a manner provided in future​ IRS guidance to measure the decline in their gross​ receipts using the immediately preceding calendar​ quarter (i.e., the fourth calendar quarter of 2020​ and first calendar quarter of 2021, respectively)​ compared to the same calendar quarter in 2019.

In addition, effective Jan. 1, 2021, the definition​ of qualified wages was changed to provide:


• For​ an employer that averaged more than 500 full-time​ employees in 2019, qualified wages are generally those​ wages paid to employees that are not providing services​ because operations were fully or partially suspended​ or due to the decline in gross receipts.


• For​ an employer that averaged 500 or fewer full-time employees​ in 2019, qualified wages are generally those wages​ paid to all employees during a period that operations​ were fully or partially suspended or during the quarter​ that the employer had a decline in gross receipts​ regardless of whether the employees are providing​ services.

Retroactive to the Mar. 27, 2020,​ enactment of the CARES Act, the law now allows employers​ who received Paycheck Protection Program (PPP) loans​ to claim the ERC for qualified wages that are not​ treated as payroll costs in obtaining forgiveness​ of the PPP loan.


For more information, see https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs