Employee Retention Credit: Changes From Recent COVID Relief Bill

 In COVID-19

January 7, 2021 |

The new COVID relief bill includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Act), which in part modifies and extends the employee retention credit included in the CARES Act signed into law by the President on March 27, 2020.

The employee retention credit (ERC) is a section in the CARES Act available to eligible employers that retained employees during the COVID-19 pandemic. It provides a fully refundable tax credit on a percent of qualified wages for the covered period(s) (identified below). The ERC’s core purpose is to encourage employers to keep employees on payroll during the credit’s covered period (originally March 13, 2020 to December 31, 2020, but now extended until June 30, 2021 with modifications).

The Act made two significant changes expanding eligibility of the ERC:

  • Paycheck Protection Program (PPP) recipients are now eligible for the ERC. The effective date of the amendment is retroactive to March 13, 2020, the original effective date from the CARES Act.
  • Extending the expiration of the ERC program from December 31, 2020 to June 30, 2021, and making changes prospectively as of January 1, 2021, to the qualifications for the ERC, which will greatly expand its applicability to employers for the period January 1, 2021 through June 30, 2021.

As noted below, the 2020 ERC and 2021 ERC are calculated differently, and qualifications for the credit vary between the two periods.

2020 Program Computations 2021 Program Computations
Credit rate at 50% of qualified wages Credit rate at 70% of qualified wages
Eligible qualified wages $10,000 per employee, per year Eligible qualified wages $10,000 per employee, per quarter
Max credit per employee $5,000 per year Max credit per employee $7,000 per quarter

Quarterly gross receipts decline of 50% compared year over year (2020 to 2019)

OR

Partial or full suspension by government order

Quarterly gross receipts decline of 20% compared year over year (2021 to 2019)

OR

Partial or full suspension by government order

Qualified Wage Base: If less than 100 employees, then most wages qualify; if over 100 employees, then only wages paid to employees not working qualify Qualified Wage Base: If less than 500 employees, then most wages qualify; if over 500 employees, then only wages paid to employees not working qualify
None Advance payments of credit permitted

2020 ERC DETAILS

Employers are eligible to claim an ERC for a quarter in which gross receipts fell by 50% or more as compared to 2019 and remain eligible to claim the ERC each quarter until the quarter after gross receipts return to 80% compared to the same quarter in 2019 or through December 31, 2020 (whichever comes first). If an employer meets this threshold, the wages paid for each entire quarter are eligible for the 50% credit, limited to $10,000 of total qualifying wages per employee per year (max $5,000 credit per employee per year). Employers are also eligible for the credit if their operations were partially or fully suspended by government order. However, in this case — only the wages paid during the partial or full suspension of operations qualify for the ERC, subject to the same limitations.

For employers with less than 100 average FTE’s in 2019, the entire amount of qualifying wages from the prior paragraph are eligible for the credit. For employers with more than 100 average FTE’s in 2019, only wages paid to employees who were not working (i.e., paying employees to stay home) are eligible for the credit.

Any wages paid to employees that are reimbursed by the Families First Coronavirus Relief Act are not eligible for the ERC.

Paycheck Protection Program Recipients:

  • The CARES Act prohibited PPP borrowers from participating in the Employee Retention Credit. However, this prohibition was removed retroactively by the Act.
  • Cannot claim an ERC for wages that were used to qualify for forgiveness for a PPP loan
  • Areas where we are awaiting guidance
    • How to handle situations where PPP forgiveness was already granted using wages
    • How to claim a retroactive credit

2021 ERC DETAILS

Employers are eligible to claim an ERC for a quarter in which gross receipts fell by 20% or more as compared to 2019. Additionally, an employer is eligible to claim an ERC for a quarter in 2021 if the prior quarter gross receipts fell by 20% or more as compared to 2019.

For example, an employer is eligible to claim an ERC for Quarter 1 in 2021 if gross receipts in Quarter 4 of 2020 OR Quarter 1 of 2021 are at least 20% lower than their respective quarter in 2019. The same determination will be made for Quarter 2 of 2021.

If an employer meets this threshold, the wages paid for each entire quarter are eligible for the 70% credit, limited to $10,000 of total qualifying wages per employee per quarter (max $7,000 credit per employee, per quarter). Employers are also eligible for the credit if their operations were partially or fully suspended by government order. However, in this case — only the wages paid during the partial or full suspension of operations qualify for the ERC, subject to the same limitations.

For employers with less than 500 average FTE’s in 2019, the entire amount of qualifying wages from the prior paragraph are eligible for the credit. For employers with more than 500 average FTE’s in 2019, only wages paid to employees who were not working (i.e., paying employees to stay home) are eligible for the credit.

Employers who receive a PPP2 loan will be eligible for the 2021 ERC. However, as with the 2020 ERC, employers cannot use the same wages for the ERC that are also used for PPP2 forgiveness.

Please be advised, the Internal Revenue Service, US Treasury, and the Small Business Administration are currently finalizing implementation guidance for taxpayers. The above guidance is based on our interpretation of the Law and other professional reference material and may change as final implementation guidance is issued.

As always, please reach out to your advisor at Simon Lever with questions and to assist as needed.

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