Optima Tax Relief looks into New IRS Law that Extends COVID Tax Credit for Companies that keep Workers on Payroll

Optima Tax Relief looks into New IRS Law that Extends COVID Tax Credit for Companies that keep Workers on Payroll

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Optima Tax Relief urges employers to take advantage of the newly-extended employee retention credit. This credit is designed to make it easier for employers that were able to keep their employees despite the challenges of COVID-19.

On December 27, 2020, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, created numerous changes to the employee retention tax credits which was 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.

Because of new legislation, eligible employers now have the ability to claim a refundable tax credit against the employer share of Social Security tax equivalent to 70% of the qualified wages that were paid to employees after December 31, 2020, through June 30, 2021. This means that the maximum Economic Recovery Credit (ERC) amount available is $7,000 per employee per calendar quarter which is a total of $14,000 in 2021.

An employer can access its ERC for the 1st and 2nd quarters of 2021 prior to filing its employment tax returns by reducing employment tax deposits. Small business employers may have the option to request advance payment of the credit on Form 7200, Advance of Employer Credits Due to COVID-19, after reducing deposits.

Effective January 1, 2021, if an eligible employer operates a trade or business during January 1, 2021, through June 30, 2021, and experience:

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

In addition, effective January 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 who 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.
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