The Consolidated Appropriations Act (CAA) made significant and beneficial changes to the Employee Retention Credit (ERC). Many companies, including those who participated in the Paycheck Protection Program (PPP), are now eligible to claim the credits for wages paid in 2020 and receive higher benefits for wages paid in 2021. This can result in a credit of up $14,000 per employee in 2021 for employers who qualify.
Background on the Employee Retention Credit
The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act created a refundable Employee Retention Credit (ERC) as an incentive for employers to keep employees on their payroll despite facing economic hardship due to the COVID-19 pandemic. Under the CARES Act, an employer could not take the ERC if it also received a PPP loan.
ERC Under the CARES Act
The Employee Retention Credit was a 100% refundable tax credit for eligible employers equal to 50% of qualified wages (including health care) paid to employees after 3/12/2020 and before 1/1/2021. The maximum amount of qualified wages allowed per employee for all calendar quarters was $10,000, making the employer’s maximum ERC credit per employee $5,000 for 2020.
Changes to the Employee Retention Credit Under the Consolidated Appropriations Act
The Consolidated Appropriations Act extends the employee retention credit to July 1, 2021, and makes significant modifications. For 2021, the maximum credit for employers is equal to 70% of qualified wages, including health care costs.
The amount an employer can claim for 2021 increased to 70% per quarter. Employers may only claim qualified wages for Q1 and Q2, as the credit expires at the end of the 2nd quarter. Thus, the maximum credit an employer can claim for 2021 is $14,000 per employee.
Employer Eligibility in 2020
A business can claim the Employee Retention Credit for 2020 if they meet one of the following two requirements:
- Business operations were either fully or partially suspended by a COVID-19 lockdown order
- For any quarter in 2020, gross receipts were less than 50% of the gross receipts for the same quarter of 2019
Once an employer was eligible for the ERC under the pre-CAA ERC rules, every subsequent quarter is also an eligible quarter until the end of the first quarter in which gross receipts exceeded 80% of the receipts from the same quarter in 2019.
Changes to ERC Employer Eligibility for 2021
The Consolidated Appropriations Act changed the eligibility requirement for reduction in gross receipts to 80% for 2021. It also allows businesses to determine reduction in gross receipts by continuing to compare gross receipts from 2021 quarters to 2019 quarters.
These changes will result in a large increase in the number of businesses eligible to claim the employee retention tax credit.
Example of Changes to the ERC
|In 2020 an eligible employer paid an eligible employee $10,000 in Q3 and $10,000 in Q4||In 2021 an employer paid an eligible employee $10,000 in Q1 and $10,000 in Q2|
|The employer’s ERC would be $5,000 because the employer’s ERC is capped at 50% of $10,000 in wages||The employer’s ERC would be $14,000, which is 70% of $10,000 wages for each of the 2 eligible quarters|
Before the CAA, qualified wages for employers with 100 or fewer full-time employees referred to wages paid to employees whether they were working or not. For employers with over 100 full-time employees, qualified wages only referred to wages paid to employees not working (ex: furloughed).
The Consolidated Appropriations Act raised the maximum employer size threshold to 500 employees. For 2021, qualified wages for employers with 500 or fewer full-time employees are wages paid to employees working and not working. For employers with over 500 employees, qualified wages are only those paid to employees not working for 2021.
Wages That Do Not Qualify for the ERC
Wages used to calculate:
- Work Opportunity Tax Credit
- PPP loan forgiveness
- FFCRA (Families First Coronavirus Response Act) credit for paid sick or family medical leave related to COVID-19
- Wages paid to relatives of individuals owning 50% or more of the business
Note: Wages paid to owners/shareholders and spouses do qualify
Claiming the ERTC
To claim the employee retention credit, report the total qualified wages for the ERC for each calendar quarter on Form 941, Employer’s Quarterly Federal Tax Return, which can reduce your payroll tax payments. If you already paid the payroll taxes or the credit is more than the taxes you owed, the ERTC is a refundable credit that can be received by amending the 941.
Employers may request an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Contact Us for Assistance
The changes made to the Employee Retention Credit make it especially valuable, and it takes proper planning to earn the maximum benefits from the ERC and PPP. If you have questions or need advice on how you can get the most out of these programs, contact us today by calling 443-320-4101 or emailing [email protected]