The coronavirus pandemic has caused many businesses to shut their doors or drastically modify their operations to do what they could in order to survive. Unfortunately, this meant layoffs or pay cuts for organizations without the resources to support their businesses during this difficult time. In response to the financial hardships these businesses were forced to bear, the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was passed and signed into law in March of 2020. Part of this relief effort was support for businesses that were financially impacted by COVID-19, in the form of a retention credit.
To encourage businesses to keep employees on the payroll, the Employee Retention Credit (ERC) allowed for refundable credits against employment taxes on 50% of qualified wages (up to $10,000 per employee) paid after March 12, 2020, and before January 1, 2021. These credits could be claimed by reducing employment tax deposits or, under certain circumstances, requesting advance payment from the IRS.
In order for a business to be eligible for the credit, employers should have been in operation during 2020 and have experienced at least a partial suspension of operations during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or a significant decline in gross receipts due to the pandemic. Employers who received Small Business Interruption Loans under the Paycheck Protection Program (PPP), were not eligible for the retention credit.
As we approached the end of 2020, it was obvious the coronavirus was still impacting many businesses due to extended lockdowns and various state rulings. The Taxpayer Certainty and Disaster Tax Relief Act was enacted on December 27, 2020, which made a few changes to the employee retention tax credits previously made available under the CARES Act. With the new legislation, employers are allowed refundable tax credits against the employer share of Social Security taxes on up to 70% of qualified wages paid during the first two quarters of 2021. Qualified employee wages are capped at $10,000 per quarter, which equates to a maximum employee retention credit of $7,000 per employee per quarter for the first half of the year.
The new law also allows employers who received Paycheck Protection Program (PPP) loans to claim qualified wages that were not treated as payroll costs in obtaining forgiveness of the PPP loan – a change that is being made retroactive to March 27, 2020. This is a big development and could be a welcome boost for employers who have been feeling the financial impacts of COVID-19, and were previously ineligible to claim these credits.
Special programs such as the ERC may be introduced or updated with little notice or fanfare and employers might miss opportunities to take advantage of these programs if they are not closely monitoring developments with the IRS. The expert professionals at Valor Payroll Solutions can help by letting you focus on what’s important to your business and give you one less thing to worry about. Contact us today!
