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Consolidated Appropriations Act Breakdown:  Employee Retention Credit

January 20, 2021

The CARES Act instituted an Employee Retention Credit (ERC) in March 2020.  It seemed like a welcome incentive to keep workers employed, but few implemented it because either they chose to take a Paycheck Protection Program (PPP) loan or they did not meet the requirements.  The Consolidated Appropriations Act (CAA) extended and modified the credit to make it more valuable and more widely available.

2020 Employee Retention Credit

The 2020 ERC, which we will revisit later in this update, remains as originally implemented EXCEPT you can claim an ERC even if you benefited from a PPP loan.  The law does not allow you to count the same wages towards your PPP forgiveness and your ERC credits.  Furthermore, no tax deduction is allowed for wages equal to the amount of ERC claimed.

With the expansion of the credits, more employers will likely qualify for the 2020 credits.  We presume you would file an amended Form 941 to claim the credits (since you’ve already deposited your 2020 payroll taxes by now), but we are awaiting further guidance for a definitive answer.

2021 Employee Retention Credit

The CAA extended the ERC through June 30, 2021 and made some impactful modifications to the 2021 credits.  To illustrate the updates, our March 31st summary of the 2020 ERC’s is copied below.  The 2021 modifications are noted in italics below the 2020 rules.

What is it and who qualifies?

  • A credit against the employer’s payroll tax deposit obligation equal to 50% of qualified wages paid by a business whose operations were fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
    • The credit percentage increases to 70% for wages paid in 2021.
  • The credit is also available to employers who have experienced a greater than 50% reduction in quarterly gross receipts when comparing 2020 to the same quarter in 2019.
  • The credit is available to employers who experience more than a 20% reduction in gross receipts, comparing quarter 1 of 2021 to quarter 1 of 2019 (not 2020) or quarter 2 of 2021 to quarter 2 of 2019. If a business did not exist at the beginning of the same quarter of 2019, the same quarter of 2020 is substituted.
  • There is some flexibility in which quarters you may evaluate to determine if there was a 20% reduction in gross receipts.
  • The credit will continue through the end of the quarter in which the business’ receipts exceed 80% of what they were for the same quarter in 2019.
  • The credit is available for each quarter that has more than a 20% decline in gross receipts.
  • Gross receipts are determined using the method used for federal income tax purposes.
  • The credit is refundable. Refunds can be claimed using the new IRS Form 7200.
  • Tax-exempt organizations are eligible for the credit.

What are “qualified wages”?

  • For employers with greater than 100 employees, qualified wages are wages paid to an employee who is NOT providing services.
    • For employers with greater than 500 employees, you must pay your employees NOT to work to have “qualified wages.”
  • For employers with less than or equal to 100 employees, qualified wages are wages paid to any employee whether they are working or not.
    • For employers with less than or equal to 500 employees, qualified wages are wages paid to any employee.
  • Note that if there is more than one business with common control, you may be required to aggregate those businesses when determining:
    • If a business was fully or partially shut down due to orders from an appropriate governmental authority, 
    • If there was a decline in gross receipts, and 
    • Whether the employer has more than 100 full-time employees (or 500 for 2021) 
  • This credit applies to wages paid after March 12, 2020 and before January 1, 2021.
    • The 2021 credit is available for wages paid from January 1, 2021 through June 30, 2021.
  • Qualified wages include the pro rata share of the cost of the employer’s health plan expenses attributable to the employees for which you’re claiming an ERC.
  • Only the first $10,000 of wages paid to any employee are eligible for the employee retention credit. The $10,000 wage limit is in effect even if your business is fully or partially closed for more than one quarter.
    • The maximum amount of qualified wages is $10,000 per employee per quarter for 2021.
  • Qualified wages do not include wages paid to individuals related to anyone owning, directly or indirectly, more than 50 percent of the stock of a corporation or more than 50 percent of the capital and profits of an entity other than a corporation.

IRS is granted authority to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.

The updates provided summarize the impact of the recent stimulus legislation.  If you have specific questions about your situation, please contact your MarksNelson advisor.

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