What Employers in Massachusetts Need to Know about the Employee Retention Credit in 2022

With businesses struggling to stay open—and with employees struggling to keep their jobs—during the height of the COVID-19 pandemic, Congress established several short-term relief programs in 2020. One of these programs was the employee retention credit. Eligible businesses could claim this refundable credit in order to offset their payroll costs, helping them continue to provide jobs despite their declining revenues.

Congress renewed the employee retention credit for 2021—with some important changes. As a result, businesses were required to reassess their eligibility when filing their returns in 2022. This article provides an overview of the most recent rules, as well as some important insights for Massachusetts business owners who may have claimed the employee retention credit improperly.

Eligibility Requirements for the Employee Retention Credit (2021 Tax Year)

The employee retention credit was subject to two main eligibility requirements for the 2021 tax year. The first related to the impacts employers experienced as a result of the COVID-19 pandemic, while the second related to the payment of “qualified wages.”

Employers Eligible to Claim the Employee Retention Credit for the 2021 Tax Year

Employers could qualify to claim the employee retention credit for the 2021 tax year if they satisfied one of two requirements. To be eligible, employers must have either:

• Experienced “[a] full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19” in 2021; or,
• Experienced “[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.”

“Qualified Wages” Eligible for the Employee Retention Credit

For 2021, the determination of “qualified wages” was based on employers’ average number of full-time employees in 2019. As amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 for the 2021 tax year, the program distinguished between companies with more or less than 500 full-time employees:

• Fewer Than 500 Full-Time Employees – 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.”
• More Than 500 Full-Time Employees – Qualified wages are “generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.”

Risks for Businesses that Improperly Claimed the Employee Retention Credit

For employers that improperly claimed the employee retention credit in 2021 (or 2020), the risks include facing an IRS audit or investigation that could lead to either civil or criminal charges for tax evasion and COVID-19 relief fraud. The IRS and other federal agencies have been heavily prioritizing enforcement in relation to COVID-19 relief programs, and employers that fail to proactively remedy their filing mistakes will remain at risk for years to come.

Schedule a Confidential Consultation with Tax Attorney Kevin E. Thorn

If you have concerns that your company may have improperly claimed the employee retention credit, or if your company is currently facing an IRS audit or investigation, we can help. To schedule a confidential consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 617-692-2989, email ket@thornlawgroup.com or contact us online now.