FEDERAL — Employee Retention Credit

The Employee Retention Credit is meant to reward employers that kept employees on their payroll during the COVID-19 impacted months. The refundable tax credit is 50% of up to $10,000 in qualified wages paid to an employee by an eligible employer experiencing economic hardship related to COVID-19. This credit is for wages paid from March 13, 2020 through December 31, 2020.

The credit is generally available to all employers regardless of size, including tax-exempt organizations. However, there are two exceptions:

  • Federal, state and local governments and their agencies or instrumentalities are not eligible.
  • Businesses that received a Small Business Interruption Loan under the Paycheck Protection Program (PPP) are not eligible.

To be eligible employers must fall into one of two categories:

  • The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.

OR

  • 2. The employer has a significant decline in gross receipts. This begins with the first quarter in 2020 when an employer’s gross receipts are below 50% of the same quarter in 2019.

Qualified wages paid by an eligible employer from 03/13/2020 through 12/31/2020 include related qualified health plan expenses and vary based on the average number of a business’ employees in 2019. 

100 or fewer employees

If the employer averaged 100 or fewer full-time employees in 2019, the credit is based on qualified wages paid to all employees, whether they worked or not. Even if the employees worked full time and were paid for full-time work, the employer still receives the credit.

More than 100 employees

If the employer averaged more than 100 full-time employees in 2019, the credit is allowed only for qualified wages paid to employees for time they were not providing services during the calendar quarter. 

Note that an employer cannot use the same wages for the Employee Retention Credit and the credits for paid sick and family leave.

STATE – Main Street Hiring Credit

California is providing a new credit for small businesses for the 2020 tax year only. The credit, also referred to as the Main Street Hiring Credit, is targeted to those businesses that had to lay off employees or dramatically reduce their employees’ hours earlier this year and are now rehiring these employees, hiring new employees, and/or increasing their workers’ hours. 

Only a limited amount of money is available for the credit. To be eligible, taxpayers must reserve the credit with the California Department of Tax and Fee Administration. Reservations are being taken on a first-come, first served basis starting December 1, 2020, and will only be taken until January 15, 2021, or when the $100 million credit allocation is reached. 

We believe the $100 million set aside for this credit will be completely reserved well before January 15, 2021, so we recommend making credit reservations as early in December as possible.

The credit is equal to $1,000 for each net increase in qualified employees, up to $100,000 maximum per taxpayer, but can only be claimed by businesses that:

  • Employed 100 or fewer employees (all employees, including part-time employees) as of December 31, 2019; and
  • Experienced a 50% decrease in gross receipts from April 1, 2020–June 30, 2020, as compared to April 1, 2019–June 30, 2019.

The net increase is measured by comparing the taxpayer’s average number of monthly full-time equivalent (FTE) employees for the second quarter of 2020 with the average number of monthly FTE employees for the five-month period beginning July 1, 2020, and ending November 30, 2020.

If you will owe little or no income tax, you can claim this credit against state and local sales and use taxes instead.

Contact us today to see if you can qualify to take advantage of these credits.