New Law Makes Big Changes to the Employee Retention Credit
January 7, 2021 – Most of the excitement from the Consolidated Appropriations Act (CAA) came from clarity on the deductibility of PPP expenses and the additional stimulus checks. However, Congress also passed a very favorable extension and expansion of the Employee Retention Credit (ERC), as well as a key retroactive change.
Any employers that qualify based on this retroactive change have an opportunity to amend 2020 payroll tax filings or catch up with the 4th quarter 2020 payroll tax filing to claim these credits.
For a quick background summary, the ERC was originally implemented by the CARES Act and provided a refundable payroll tax credit that was available to taxpayers who either:
- Had their business fully or partially suspended during at least one quarter in 2020, or
- Had more than a 50% decline in gross receipts for quarters in 2020 relative to the same quarter in 2019. The credit continued to be available through the quarter following the first quarter in which gross receipts were greater than 80% of the gross receipts in the corresponding quarter in 2019.
The credit was equal to 50% of qualified wages paid, capped at $10,000 in qualified wages paid to each employee for all calendar quarters between March 12, 2020, and December 31, 2020.
However, two significant roadblocks kept businesses from benefitting from the ERC. First, any employers that obtained PPP loans were unable to claim the ERC. Second, businesses with more than 100 full-time employees in 2019 could not take the credit for wages paid to an employee that was still performing services for the company. Put another way, any business with more than 100 employees needed to pay people not to work to qualify for the credit.
The CAA retroactively changed the interplay of PPP loans and the ERC. Now employers that received a PPP loan are also eligible for the ERC. However, any qualified wages used for the ERC cannot be included as forgivable PPP payroll costs. Any employers that qualify based on this retroactive change have an opportunity to amend 2020 payroll tax filings or catch up with the 4th quarter 2020 payroll tax filing to claim these credits.
The CAA also extended the credit period from December 31, 2020, to June 30, 2021, and significantly expanded the number of businesses that can benefit from the credit. Key changes that take effect with the 1st calendar quarter of 2021 include:
- The credit is increasing from 50% to 70% of qualified wages,
- The limit on qualified wages is increasing from $10,000 per year to $10,000 per quarter, which increases potential annual credits per employee from $5,000 to $14,000,
- Eligibility for the credit is significantly expanded by modifying the required quarterly gross receipts decline from more than 50% to more than 20%,
- A new safe harbor was added allowing businesses to use the prior quarter’s gross receipts instead of the current quarter’s gross receipts to determine eligibility,
- The full-time employee rule described above is increasing from 100 to 500. This will provide credit opportunities to significantly more employers, and
- Employers with 500 full-time employees or less can generally receive advances on the credit
Those who wish to retroactively claim credits for the 2020 calendar year are encouraged to reach out to their trusted tax advisor. We also anticipate additional guidance from the IRS regarding retroactive credit claims to be released in the future. Finally, if you would like to review select content related to Covid-19 legislation and concerns, you can visit our resource center.