Employee Retention Credit: Good Through Year-End

The nation’s employers, big and small, surely are pleased that they will continue to have federal help with payroll costs throughout this year.

Congress extended a powerful tax benefit, the “employee retention credit,” in the American Rescue Plan Act of 2021. It would have disappeared on June 30, but now employers hit by economic effects of the coronavirus emergency can count on the credit until Jan. 1, 2022.

Along with renewing it for the upcoming third and fourth quarters, the legislation included some very specific expansions of the credit. Earlier this month, the Internal Revenue Service issued an update about the tax credit and answered some issues brought up by employers.

In general, the employee retention credit can offset as much as $7,000 of employment costs of a worker each quarter. That’s 70 percent of a maximum $10,000 of “qualified wages” (which can include employer-provided health insurance costs, too).
To claim the credit, an employer must have made 80 percent or less revenue than the same quarter in the prior year. Businesses forced to suspend operations for COVID-19 reasons also are eligible.

The new law also acknowledged employers with 10 percent or less revenue year-to-year as “severely financially distressed.”
It also created a category called a “recovery startup business.” Those businesses, which must have been established after Feb. 15, 2020, can claim a total retention credit up to $50,000 per quarter.

As mentioned earlier, the IRS also took the opportunity to clear up some questions by employers. A couple of answers are:
• Employers do not need to include FTE of positions in figuring the sizes of their companies or non-profits for eligibility.
• An employee’s cash tips greater than $20 in any month are included as compensation in calculating qualified wages for the credit.

For more information, see https://www.irs.gov/newsroom/treasury-irs-provide-additional-guidance-to-employers-claiming-the-employee-retention-credit-including-for-the-third-and-fourth-quarters-of-2021
For the technical notice, check out https://www.irs.gov/pub/irs-drop/n-21-49.pdf

The employee retention credit will continue to benefit many employers this year. It also is a very technical credit to interpret and claim. Eric Buechler, principal of EricJohn Ltd., can advise about use of the credit for your business.