Key Points

• Effective January 1, 2021, public colleges, universities, and governmental entities whose primary purpose is providing medical or hospital care are eligible for the employee retention and rehiring tax credit.
• The amount of the credit is equal to 70 percent of up to $10,000 in eligible wages per employee per quarter for the first two quarters of 2021.
• The tax credit is claimed as an offset to employment taxes otherwise payable by the employer.

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Effective January 1, 2021, certain governmental organizations are now eligible for the employee retention and rehiring payroll tax credit originally established under Section 2301 of the CARES Act, which was previously only available to private-sector employers. The credit is available as an offset to payroll taxes based on eligible wages paid from January 1, 2021, through June 30, 2021.

Q: Which governmental employers are eligible for the new extended and enhanced employee retention payroll tax credits?

A: Public colleges, public universities, and governmental entities whose principal purpose is proving medical or hospital care are eligible. These governmental employers also must have either: (1) had operations fully or partially suspended during 2021 due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or (2) had a more than a 20 percent decline in gross receipts in any calendar quarter in 2021 compared to the same quarter in 2019.

Q: How is the employee retention payroll tax credit calculated?

A: The payroll tax credit is equal to 70 percent of the qualified wages per employee up to $10,000 in each of the first two quarters of 2021.

For employers that averaged 500 or fewer full-time employees during 2019, qualified wages are those paid to any employee during any period in the calendar quarter in which the business operations are fully or partially suspended due to a governmental order or any calendar quarter the business is experiencing a significant decline in gross receipts (more than 20 percent).

For employers that averaged more than 500 full-time employees during 2019, qualified wages are those paid to employees for time that the employee is not providing services due to either (1) a full or partial suspension of the employer's business operations by a governmental order, or (2) the business experiencing a significant decline in gross receipts (more than 20 percent).

In both instances, certain amounts paid by an employer to provide or maintain a group health plan can be included in eligible wages, even if no other wages are paid to the employee.

Q: How can eligible governmental employers receive the employee retention payroll tax credit?

A: Presumably, the eligible governmental employer will use the same process the IRS has used for private-sector employers claiming this tax credit during 2020. The IRS issued Information Release 2020-62 early in 2020, indicating that employers could be immediately reimbursed for the credit by reducing their required deposits of payroll taxes.

During 2020, employers claiming these types of payroll tax credits have been able to request an advance payment of the employee retention payroll tax credits. After reducing employment tax deposits to account for the credits, eligible employers could request the amount of the credit that exceeded the reduced deposits either by filing Form 7200 or waiting for a refund when claiming credits on their quarterly employment tax return.

Under the year-end tax legislation, the IRS is directed to provide guidance on how employers whose number of average full-time employees in 2019 was not greater than 500 may receive advance payment of the employee retention payroll tax credit based on using 70 percent of the average quarterly payroll for the same quarter in 2019. If the amount of the actual payroll credit determined at the end of the quarter in 2021 is less than the amount of the advanced payment, the employer will have to repay the excess to the IRS. We expect the IRS to clarify whether this advance payment process would be available to eligible governmental employers with 500 or fewer employees.

We also expect the IRS to issue guidance in the near future on whether governmental employers newly eligible for this payroll tax credit will be able to use a revised Form 7200 or will need to use a newly-issued different Form. We will update our guidance as the IRS issues further instructions.

Q: If an employer offsets the tax credit from the employer FICA tax and does not make the deposit of these employment taxes on the deposit due date, will the employer incur a penalty for failing to timely deposit employment taxes?

A: No, this should not be the case. The CARES Act specifically directs the IRS to waive the failure to deposit penalty that would otherwise apply with respect to the employee retention payroll tax credit amounts. The IRS issued Notice 2020-22 that waived these penalties with respect to wages affected during 2020. Technically, the IRS will need to extend the penalty relief provided under Notice 2020-22 for employers who fail to deposit such taxes with respect to wages paid in 2021.

For further information on the employee retention payroll tax credits available to governmental employers under the COVID-19 relief provisions of the year-end 2020 appropriations legislation, please contact a member of the Hanson Bridgett Employee Benefits team.