What Employers Need to Know About the Extended Employee Retention Tax Credit
Employers that keep workers on their payrolls are eligible for a refundable Employee Retention Tax Credit (ERTC), which was extended and enhanced in the latest law.
Background on the Employee Retention Tax Credit
The ERTC was created by the CARES Act, which was enacted in March 2020. The credit:
- Equaled 50% of qualified employee wages paid by an eligible employer in an applicable 2020 calendar quarter,
- Was subject to an overall wage cap of $10,000 per eligible employee, and
- Was available to eligible large and small employers.
Changes to the Employee Retention Tax Credit
The Consolidated Appropriations Act, enacted December 27, 2020, enhances and extends the ERTC. Under the CARES Act, the credit only covered wages paid between March 13, 2020, and December 31, 2020. The new law extends the covered wage period to include the first two calendar quarters of 2021, ending on June 30, 2021.
For the first two quarters of 2021, the new law increases the overall covered wage ceiling to 70% of qualified wages paid during the applicable quarter (versus 50% under the CARES Act). It increases the per-employee covered wage ceiling to $10,000 of qualified wages paid during the applicable quarter (versus a $10,000 annual ceiling under the original rules), with a maximum credit of $7,000 per employee, per quarter. The credit also is available even if an employer received the $5,000 maximum credit for wages paid to an employee in 2020.
In addition, the Consolidated Appropriations Act removes the CARES Act cap on wages to allow the credit to be claimed on pay increases and bonuses in excess of the amount that the employee earned during the 30 days preceding the shutdown or the significant decline in gross receipts.
Interaction with the Paycheck Protection Program
The Consolidated Appropriations Act stipulates that the ERTC can be claimed (retroactively to March 12, 2020) as long as the employer does not claim the credit with respect to wages paid with the proceeds of a Paycheck Protection Program (PPP) loan that was forgiven. However, an employer may claim the credit for qualified wages paid with proceeds from PPP loans that aren’t forgiven.
It also 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.
Employers that claim the credit retroactively for wages paid in 2020 may generally claim the credit on their fourth-quarter Form 941 due by January 31, 2021.
The Consolidated Appropriations Act increased the threshold for determining a large employer to employers with more than 500 full-time employees in 2019. This change allows more employers to be considered small employers and claim the credits on all wages paid to employees, even if the employees are providing services during the period for which the credits are claimed. An employer with more than 500 full-time employees in 2019 may claim the credit only for wages paid to an employee while the employee is not performing services for the employer.
The Consolidated Appropriations Act requires a 20% reduction (rather than 50%) in gross receipts to qualify for the credit, which makes it easier for employers to be an eligible employer for this credit. Employers that experience a full or partial suspension of business operations due to a COVID-19-related governmental order will also continue to qualify for the credit, regardless of the amount of an employer’s total gross receipts.
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