Expansion of the Employee Retention Credit
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.
ERC for 2020
The Act makes the following retroactive changes to the ERC, which apply
during the period March 13, 2020 through December 31, 2020:
Employers that received PPP loans may
qualify for the ERC with respect to wages that are not paid with proceeds
from a forgiven PPP loan.
The Act clarifies how tax-exempt
organizations determine “gross receipts.”
Group health care expenses are considered
“qualified wages” even when no other wages are paid to the employee.
Insights
Employers that received a PPP loan and that
were previously prohibited from claiming the ERC may now retroactively
claim the ERC for 2020.
With respect to the retroactive measures in
the Act, employers that paid qualified wages in Q1 through Q3 2020 may
elect to treat the qualified wages as being paid in Q4 2020. This should
allow employers to claim the ERC in connection with such qualified wages
via a timely filed IRS Form 7200 or Form 941, as opposed to requiring an
amended return (IRS Form 941-X) for the prior quarter(s) in 2020.
ERC for 2021 (January 1 – June 30, 2021)
In addition to the retroactive changes listed above, the following changes
to the ERC apply from January 1 to June 30, 2021:
Increased Credit Amount
The ERC rate is increased from 50% to 70% of
qualified wages and the limit on per-employee wages is increased from
$10,000 for the year to $10,000 per quarter.
Broadened Eligibility Requirements
The gross receipts eligibility threshold for
employers is reduced from a 50% decline to a 20% decline in gross receipts
for the same calendar 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.
The credit is available to certain
government instrumentalities, including colleges, universities,
organizations providing medical or hospital care, and certain
organizations chartered by Congress.
Determination of Qualified Wages
The 100-full time employee threshold for
determining “qualified wages” based on all wages paid to employees is
increased to 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).
Advance Payments
Under rules to be drafted by Treasury,
employers with less than 500 full-time employees will be allowed advance
payments of the ERC during a calendar quarter in which qualifying wages
are paid. Special rules for advance payments are included for seasonal
employees and employers that were not in existence in 2019.
Insights
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 with 500 or fewer
employees may now claim up to $7,000 in credits per quarter, paid to all
employees, regardless of the extent of services performed. Previously this
rule was applicable to employers with 100 or fewer employees and a maximum
of $5,000 in credit per employee per year. Aggregation rules apply to
determine whether entities under common control are treated as a single
employer.
The Act may provide significant opportunities for your company. However,
the interplay between the Act, the CARES Act and various Internal Revenue
Code sections is nuanced and complicated so professional advice may be
needed.
Need Help?
If you think your business can benefit or is interested in claiming the
Employee Retention Credit, BOOS & ASSOCIATES is here to help! To
inquire more information please email us at askboos@booscpa.com.
