EMPLOYEE RETENTION TAX CREDIT

EMPLOYEE RETENTION TAX CREDIT

EMPLOYEE RETENTION TAX CREDIT – UPDATED EMPLOYER GUIDANCE

On January 4th, 2021 Congress passed into law The Consolidated Appropriations Act to help all taxpayers impacted by the ongoing Coronavirus pandemic. This $900 Billion package included an additional round of stimulus checks to qualifying individuals, enhanced unemployment benefits, and more modifications to the CARES Act that will provide support to business sectors affected in 2020 and 2021. One of these modifications was significant changes and extension of the Employee Retention Credit. This guide will focus primarily on the updates to this credit, how it will impact your upcoming quarterly payroll filings and what you can do to maximize your benefit.

CARES Act Original Credit Guidance

Established under the CARES Act, the Employee Retention Tax Credit (ERTC) is a refundable credit against applicable federal employment taxes for employers. The CARES Act credit was provided for 50% of wages that were paid or incurred from March 13, 2020 through December 31, 2020. On a per employee basis, wages were capped at $10,000 for a max credit of $5,000 across all quarters. The credit was not available to those employers who had received a loan under the Paycheck Protection Program (“PPP”). In addition, the credit was restricted to those employers with 100 employees or less who also exhibited at least a 50% decline in quarterly gross receipts from 2019 to 2020.

The Consolidated Appropriations Act Updated Guidance

Time Period – The update included an extension of the time period for which eligible wages were paid or incurred for to between January 1, 2021 and June 30, 2021. This covers the first and second quarterly payroll filings for 2021.

Qualified Wages – Any wages paid during this time are refundable as a credit, and the percentage is increased to 70% instead of 50%.  The extension of the ERTC applies to calendar year 2021 only. Qualified wages are based on the business’ average number of full-time employees in 2019.

  • Small employers – those that had 500 or fewer employees may receive the credit for wages paid to employees whether they are working or not.
  • Larger employers – those that had more than 500 employees may only receive the credit for wages paid to employees for time the employees are not working.

Please Note: Employers who take the employee retention credit cannot take the credit on those same qualified wages for paid family medical leave.

Per Employee Max Credit – The wages are still capped at a max of $10,000 per employee but it is no longer limited to the entire year, it is on a per quarter basis. Meaning, companies are allowed a max refund credit of $7,000 per quarter per employee that is paid at least $10,000 in a quarter. Please refer to the illustration below for a better explanation of how the calculation has changed and how it can affect your payroll tax returns.

The following is an illustration showing the calculation of the credit in 2021 as compared to the 2020 CARES Act regulations.

2020 Calculation of Employee Retention Credit (under CARES Act)

Quarter 2 wages paid (April 1 – June 30) $10,000
% allowed for refund 50%
Refundable Employee Retention Credit $5,000
Quarter 3 wages paid (July 1 – September 30) $10,000
% allowed for refund 50%
Refundable Employee Retention Credit $0 (Annual cap previously reached)

2021 Calculation of Employee Retention Credit (under latest COVID-19 Relief Bill)

Quarter 1 wages paid (Jan 1 – Mar 31) $10,000
% allowed for refund 70%
Refundable Employee Retention Credit $7,000
Quarter 2 wages paid (April 1 – June 30) $10,000
% allowed for refund 70%
Refundable Employee Retention Credit $7,000

PPP Loan Eligibility – Not previously allowed under the CARES Act, employers are now eligible for both the Employee Retention Credit as well draws of the PPP. This change is considered retroactive and is applicable to both the first and second rounds of PPP funding. Unfortunately, the wages used in calculation for the Employee Retention Credit must be excluded in the calculation necessary for the PPP Loan. Because the Employee Retention Credit caps wages per employee at $10,000, any employee that is compensated greater than that per quarter can have their wages included in the PPP Loan.

Eligible Employer – Previously restricted to employers with 100 or less employees, this has now been increased to 500 employees. In addition, in order for an employer to claim the ERTC, they must meet the following criteria:

  • The employer was carrying on a trade or business during the calendar quarter for the period beginning on January 1, 2021 and ending June 30, 2021; and

Either:

  • The operation of the employer’s trade or business is fully or partially suspended during the calendar quarter for the period beginning on January 1, 2021 and ending June 30, 2021 under orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
  • The employer’s calendar quarter is within the period during which the employer is experiencing a 20% decline in gross receipts.

Decline in Gross Receipts – The Act expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20%, and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility. Additionally, the credit is now expanded to allow new employers who were not in existence for all or part of 2019 to claim the credit by using the same calendar quarter in 2020.

The period of significant decline in gross receipts:

  • Begins with the first calendar quarter in January 1, 2021 through June 30. 2021 for which the employer’s gross receipts have decreased by at least 20 for the same calendar quarter in 2019; and
  • Ends with the earlier of; July 1, 2021 or the first calendar quarter after the first calendar quarter in 2021 for which gross receipts are less than a 20% for the same calendar quarter in 2019.

Below is a summary of the provisions of the Employee Retention Credit under the latest COVID-19 Relief Bill as compared to those under the CARES Act in March 2020.

  Employee Retention Credit (Per CARES Act) Employee Retention Credit (UPDATED As of 1/4/2021)
Time Period for Eligible Wages March 13, 2020 –

December 31, 2020

January 1, 2021 – July 1, 2021
% of Wages Eligible for Refundable Credit 50% 70%
Limit on Per-Employee Creditable Wages $10,000 for the year $10,000 per each quarter
Eligibility for Credit Gross receipts must decrease by 50% when compared to 2019 quarter Gross receipts must decrease by 20% when compared to 2019 quarter
Max Number of Employees 100 500
Eligible for PPP Loan No Yes
Employee Qualification Only eligible employees for 2019 Any new employees hired during 2020 can be included in credit calculation

 How to Claim the ERTC

The credit can be claimed by an eligible employer on their quarterly federal employment tax return, Form 941. In order to fund current payroll, employers have the option of either reducing their federal employment tax deposits or requesting an advance payment of the credit by filing Form 7200. The credit is initially applied against the 6.2% employer’s share of social security taxes due on all wages paid to all employees for the quarter. If the credit exceeds that amount, the remaining credit may offset the rest of the payroll tax liabilities on Form 941 for the quarter. If the credit exceeds all payroll tax liabilities for the quarter, the company may receive a refund.

For those employers who only recently became eligible for the ERTC for 2020 due to the changes in requirements surrounding the PPP, filing a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund is permitted for a specific quarter to claim the credit. However, as previously mentioned, wages eligible for calculation of the credit cannot be claimed as eligible expenses forgiven under the company’s PPP Loan.

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