Employee Retention Tax Credit

This page will be updated continuously to reflect the most recent information on the coronavirus. This page was last updated on January 3, 2020.

 

Overview

On December 27, 2020, the Coronavirus Response and Relief Supplemental Appropriations Act (“COVID relief law”) was signed into law, providing additional relief to small businesses struggling as a result of the COVID-19 pandemic.

 

*** EXTENSION AND ENHANCEMENT OF EMPLOYEE RETENTION CREDIT ***

The COVID relief law extends the employee retention tax credit through June 30, 2021, increases the credit amount, and makes other improvements.

*** CHANGES TO CREDIT AMOUNT, ELIGIBLITY, PPP INTERACTION ***

 

Extension of credit availability.  TheCoronavirus Aid, Relief, and Economic Security (CARES) Act created a refundable payroll tax credit for businesses (large and small) and non-profits that retain their employees during the COVID-19 crisis.  The credit was originally provided for wages paid between March 12, 2020, and December 31, 2020.  The COVID relief law extends the credit for two quarters, through June 30, 2021.

 

Larger credit amount.  Under the CARES Act, the credit was originally equal to 50 percent of qualified wages, including group health plan expenses.  The COVID relief law increases the credit to 70 percent of qualified wages.

 

Higher cap on maximum credit:

  • The CARES Act capped the credit at 50 percent of qualified wages per eligible employee, up to $10,000 in wages per employee.
    • In other words, employers were allowed to claim a credit of up to $5,000 per employee.
    • Now, in addition to the larger credit amount (70 percent vs. 50 percent), the credit is capped at $10,000 in wages per employee, per quarter.
      • So, for the first half of 2021, employers may claim a credit of $14,000 per employee ($10,000 in qualified wages * 70 percent credit rate * 2 quarters).

 

Relaxed eligibility requirements:

Revenue decrease

  • Under the CARES Act, employers were eligible to claim the credit if they had fully or partially suspended business operations as a result of a government order, or if they experience a 50 percent reduction in quarterly receipts as a result of the crisis (as compared to the same quarter in 2019).
  • The COVID relief lawlowers the bar for how hard-hit a business must be in order to claim the credit.  Now, employers may claim the credit if they experience a 20 percent reduction in gross receipts for a quarter in 2021 compared to the same quarter in 2019.  Business may continue to claim the credit if their operations are fully or partially suspended by a COVID-19 lockdown order.

Definition of large employer

  • For purposes of claiming this credit, the definition of “qualified wages” depends on the number of employees the business has.  Under the CARES Act, if the employer had more than 100 full-time employees, qualified wages had to be paid to employees who were not providing services (e.g., furloughed).  But if the employer had 100 or fewer full-time employees, all employee wages were eligible for the credit.
    • In other words, businesses with more than 100 employees could only claim the credit when they retained employees who were not working.  Meanwhile, small employers could claim the credit for any employee, including those who continued working.
    • The COVID relief law raises this threshold to 500 full-time employees.  In 2021, a company with 500 or fewer employees will be eligible to claim the credit even if its employees are working.

Governmental entities

  • Under the CARES Act, this credit was not available to federal, state, or local government entities.
  • The COVID relief law permits certain governmental employers to claim the credit, including state- and local-run colleges and universities and entities whose principal function is providing medical or hospital care.

 

PPP availability:

  • Under the CARES Act, employers were not permitted to claim the employee retention tax credit if they received an SBA Paycheck Protection Program (PPP) loan.  The COVID relief law removes this limitation.  Now, a company that receives a PPP loan is no longer prohibited from claiming this credit.
  • This change is retroactive to the CARES Act (i.e., for wages paid after March 12, 2020).  Therefore, if an employer had a PPP loan forgiven in 2020, but paid qualified wages in excess of the PPP amount it used for wages, it can claim this credit.
    • Importantly, a company may not “double dip” and claim a credit for wages paid with the proceeds of a forgiven PPP loan.

 

Applying the tax credit:

  • The credit can be claimed against the business or non-profit’s quarterly payroll tax liability and is fully refundable to the extent of excess.
  • The COVID relief law directs the Treasury Department to draft rules for allowing an advance payment of the credit to companies with 500 or fewer employees.

 

More information.  Please check the IRS’s website for more information as it becomes available: https://www.irs.gov/coronavirus/coronavirus-tax-relief-for-businesses-and-tax-exempt-entities.