Behold: A More Robust Tax Credit To Help You Retain Employees In The Midst Of An Ongoing Pandemic
The Consolidated Appropriations Act of 2021 (Act), signed into law on December 27, 2020, contains significant enhancements and improvements to the Employee Retention Credit (ERC). The ERC, which was created by the CARES Act on March 27, 2020, is designed to encourage employers (including tax-exempt entities) to keep employees on their payroll and continue providing health benefits during the Coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.
Employers may use ERCs to offset federal payroll tax deposits, including the employee FICA and income tax withholding components of the employer’s federal payroll tax deposits.
Key changes include:
- Employers that previously reached the credit limit on some of their employees in 2020 can continue to claim the ERC for those employees in 2021 to the extent the employer remains eligible for the ERC.
- Qualification for employers in 2021 based on the reduction in gross receipts test may provide new opportunities for businesses in impacted industries.
- Eligible employers may now claim a credit of up to $7,000 per employee, per quarter for qualified wages paid between Jan. 1, 2021, and June 30, 2021. Previously the credit was a maximum of $5,000 per employee per year.
- For employers with 500 or fewer employees, qualified wages include amounts paid to employees regardless of the extent of services performed. Previously, this rule was only applicable to employers with 100 or fewer employees. Employers over the threshold may only include wages paid to employees who are not providing any services.
The Act may provide significant opportunities for your company. However, the interplay between the Act, the CARES Act, and various Internal Revenue Code sections are nuanced and complicated so professional advice may be needed.
|CARES Act||Consolidated Appropriations Act, 2021|
|Time Period Credit is Available||Qualified wages paid during the period March 13, 2020 through Dec. 31, 2020.||Qualified wages paid during the period March 13, 2020, through June 30, 2021.|
|ERC Rate||50% of qualified wages, plus the cost to continue providing health benefits to the employee.||70% of qualified wages, plus the cost to continue providing health benefits to the employee.|
|Maximum Credit Amount||$5,000 per employee (for the year).||$7,000 per employee (per quarter, through June 30, 2021). The 2021 credit is available even if the employer received the maximum credit for wages paid in 2020.|
|Broadened Eligibility Requirements||50% decline in gross receipts for the same calendar quarter in 2019.|
Businesses that were not in existence in 2019 could use a comparison to 2020 to determine eligibility.
|20% decline in gross receipts compared to the same quarter in 2019.|
A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
|Determination of Qualified Wages||100 or fewer full-time employees.||500 or fewer full-time employees.|
The Act strikes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
|Paycheck Protection Program Loan Interplay||An employer that received a PPP loan was not eligible to claim the employee retention credit.|
This disallowance rule extended to all affiliated employers that shared common ownership, so that if one employer received a PPP loan, any other employer with more than 50% common ownership was ineligible to claim the credit.
This has been REPEALED.
|An employer that received or receives a PPP loan is no longer prohibited from claiming the employee retention tax credit.|
The credit, however, may not be claimed for wages paid with the proceeds of a PPP loan that have been forgiven.
An employer that received a PPP loan in 2020 and paid qualified wages in excess of the amount of the forgiven PPP loan used to pay wages, and is otherwise eligible to claim the credit, can claim the credit retroactively. The IRS is expected to issue guidance on how to claim the credit retroactively.
Employers related to a PPP borrower that did not claim the credit because of the affiliation rules should be able to claim the credit retroactively if they are otherwise eligible for the credit.
This change is retroactive to the effective date under the original law for wages paid after March 12, 2020.
If you believe you qualify, please reach out to your Rea advisor or your payroll provider to get further information.