Leveraging COVID Relief: Claiming Employee Retention Credits for 2021 Shutdowns

The COVID-19 pandemic continued causing business disruptions in 2021, including temporary full or partial shutdowns. Fortunately, the employee retention tax credit offered vital relief enabling employers to offset labor costs for staff affected by these closures. This blog examines how to qualify for and claim potentially substantial credits due to shutdowns during 2021.

Overview of the Employee Retention Tax Credit

The employee retention credit is a refundable payroll tax credit that was introduced in the CARES Act and extended through 2021. It incentivizes employers to keep employees on payroll during COVID-19 challenges. Key attributes include:

  • Equal to 50% of qualified wages up to $10,000 per employee per quarter in 2021.
  • Applies to eligible wages paid from January 1, 2021, through December 31, 2021.
  • Eligibility can be based on experiencing a full or partial suspension of operations due to a governmental COVID-19 order.
  • Provides up to $28,000 per employee for 2021.
  • Claimed against the employer’s share of payroll taxes and excess refunded by the IRS.

This powerful credit offers businesses forced to fully or partially close in 2021 the ability to offset labor costs and survive shutdowns.

Qualifying Shutdowns in 2021

Two main avenues exist for employers to qualify for credits due to 2021 shutdowns:

  1. Completely suspending operations during any 2021 quarter because a governmental authority, due to COVID-19, ordered businesses like the employer to fully close or cease operations.
  2. Partially suspending operations during the 2021 quarter because a governmental order required the employer to limit commerce, capacity, or certain business activities due to the pandemic.

Examples of eligible 2021 shutdowns include:

  • State or local orders closing restaurants, bars, entertainment venues, gyms, or other businesses.
  • Capacity restrictions forcing reduced operations.
  • Remote work mandates shutting down normal on-site activities.
  • Bans on gatherings leading to event cancellations or workplace closures.
  • Restrictions requiring COVID-19 mitigation protocols limiting business activities.

Documenting the Required Shutdown

Employers will need to retain documentation proving:

  • The relevant governmental order requires a full or partial shutdown due to COVID-19.
  • How the order specifically applied to the employer’s operations and required reducing or ceasing activities during 2021.
  • Proof that business activities were limited or suspended for the covered period as mandated.

Meticulous documentation is key, as unclear or inadequate substantiation of required shutdowns will jeopardize credits.

Claiming Process Overview

The general process to claim credits for 2021 COVID-19-related shutdowns includes:

  • Determining the number of employees affected by the shutdown.
  • Calculating qualified wages paid to those employees for the period operations were fully or partially suspended.
  • Reporting qualified wages and health expenses on IRS Form 941 quarterly payroll tax returns.
  • Claiming the credit amount to offset required employer payroll tax deposits.
  • Submitting Form 7200 to receive advance payment of any excess credit beyond taxes owed.
  • Providing thorough documentation to support eligibility and credit calculations.

Qualified Wage Rules

Complex rules govern the wage amounts that qualify when calculating credits:

  • For employers with over 100 full-time employees in 2019, credits only apply to wages paid to employees not providing services during the shutdown.
  • Employers with 100 or fewer full-time employees in 2019 can claim credits on wages paid to all employees during the suspension period, even for hours worked.
  • Credits exclude any wages exceeding $10,000 per employee for a quarter.

Employers also need to carefully determine applicable quarterly periods where shutdowns occurred.

Planning for Maximum Relief

Proper planning enables optimizing relief:

  • Identify all COVID-19 governmental orders requiring full or partial shutdowns in 2021.
  • Pinpoint all quarters where suspensions of operations occurred.
  • Classify status as large or small employer based on 2019 full-time employees.
  • Calculate qualified wages accurately based on shutdown periods and employee rules.
  • Claim credits on Form 941 promptly for every applicable quarter.
  • Be prepared to provide complete substantiation of the required shutdowns.

Significant worker retention assistance is available for employers negatively impacted by 2021 COVID-19 closures. However, credits depend on the proper execution of complex compliance requirements.

The Bottom Line

The pandemic continued yielding economic fallout in 2021 as shutdowns disrupted countless businesses. The generous employee retention credit enables employers to defray shutdown-related labor costs through this ongoing crisis. Careful planning and documentation are key to ensuring full access to this vital relief opportunity.

FAQs

Q: What documentation is needed to prove a government-ordered shutdown?

A: Copies of the relevant COVID-19-related governmental orders requiring businesses to close or reduce operations.

Q: Can I claim credits for partial shutdowns?

A: Yes, reductions in operations due to governmental COVID-19 orders can qualify for partial suspension credits.

Q: How are qualified wages calculated?

A: For large employers, it is based on wages paid to idled staff during the closure. Small employers can claim wages paid to all staff during the shutdown.

Q: What is the maximum credit amount per employee?

A: Up to $10,000 in qualified wages per employee, per quarter. The total 2021 credit is capped at $28,000 per employee.

Q: When do I claim credits for 2021 shutdowns?

A: On Form 941 payroll tax returns for the quarter the shutdown occurred. 2021 credits start on 1Q 2021 Form 941.

Resources:

  • IRS Instructions for Form 941 – Claiming Employee Retention Credits
  • 2021 IRS Notice 2021-23 – Shutdowns Impact on ERC Eligibility
  • AICPA Calculator for Employee Retention Credits
  • U.S. Chamber of Commerce ERC Webinars
  • Top 5 Frequently Asked Questions on the Employee Retention Credit (CliftonLarsonAllen)

Documenting eligibility and claiming credits properly for COVID-19-related 2021 shutdowns enables access to this vital relief. Consult a tax advisor to ensure full compliance.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top