The Employee Retention Credit (ERC), which was originally included in the CARES Act (original law) passed in March 2020, provided a refundable payroll tax credit of 50% for up to $10,000 in qualifying wages per employee paid by an eligible employer whose business had been financially impacted by COVID-19. However, this credit was not available to businesses that had borrowed under the Paycheck Protection Program (PPP).
The Consolidated Appropriations Act (new law), which was signed into law on December 27, 2020, makes the following significant changes pertaining to the ERC:
- Makes the original ERC available to the borrowers of the PPP loan retroactively to March 13, 2020. However, there are no changes to the eligibility requirements or computational aspects of the credit for qualified wages paid after March 12,2020 and before January 1, 2021.
- Extends and modifies the eligibility requirements and computational aspects of the credit for qualified wages paid from January 1, 2021 through June 30, 2021, at which time this credit is set to expire.
The outline below highlights the contrast between the original and the new law and explains how your business can take advantage of this valuable tax incentive for 2020 and 2021.
Covered Period
Original law – Applicable to qualified wages paid after March 12, 2020 and before Jan 1, 2021.
New law – Applicable to qualified wages paid after March 12, 2020 and before July 1, 2021 with some changes to the eligibility and credit computation to wages paid from January 1, 2021 to June 30, 2021 only.
Eligibility Requirements
Original law – Under the CARES Act, the ERC is available only if the business falls into one of the following two categories:
- The employer’s business was fully or partially suspended by government order due to COVID-19 during the calendar quarter, in which case only the wages paid during the full or partial shutdown period qualify for the credit;
or - The employer’s gross receipts dropped below 50% of the comparable quarter in 2019. Once the employer’s gross receipts rise above 80% of a comparable quarter in 2019, they no longer qualify for the credit after the end of that quarter.
New law – Under the Consolidated Appropriations Act, the extended ERC is available only if the businesses fall into one of the following two categories during the first two quarters of 2021:
- The employer’s business was fully or partially suspended by government order due to COVID-19 during the calendar quarter, in which case only the wages paid during the full or partial shutdown period qualify for the credit;
or - The employer’s gross receipts dropped below 80% of the comparable quarter in 2019. Alternatively, businesses have the option to meet this requirement only for 2021 by comparing the immediately preceding quarter to the same quarter in 2019.
Qualified Wages and Number of Employees Threshold
For purposes of calculating the ERC, qualified wages are based on the monthly average number of employees in 2019.
Original law – Under the original law, if the employer had 100 or fewer “full time employees” (FTEs) on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked or not. If the employees were paid for full-time work, the employer still receives the credit.
For employers with more than 100 FTEs on average in 2019, the original law only allowed the credit for wages paid to employees who did not work during the calendar quarter.
New law – Effective January 1, 2021, the new law increases the FTE threshold to 500 employees and allows employers with 500 or fewer FTEs to claim the credit based on wages paid to all employees, whether they provided services or not.
The ERC for employers with more than 500 FTEs will continue to be limited to wages paid to employees who did not work during the first two quarters of 2021.
Credit Amount for Qualified Wages Paid after March 12,2020 and before January 1, 2021
Original law – The original law set the maximum amount of wages that can qualify for the credit at $10,000 per employee (including qualified health plan costs) for wages paid after March 12, 2020 and before January 1, 2021. The credit is 50% of such qualified wages; therefore, an eligible employer can claim up to $5,000 per employee in payroll tax credits for entire 2020 covered period.
New law – The new law does not change any computational or eligibility aspects of the credit for wages paid in 2020 but simply opens the doors for borrowers of PPP loans to look back at 2020 and determine if they have any opportunity to claim the ERC. It is important to remember, however, that an employer cannot claim the ERC for wages paid with forgiven PPP funds, as it would amount to double dipping, which is prohibited.
Credit Amount for qualified wages paid from January 1, 2021 to June 30, 2021
Under the new law, the maximum amount of wages that can qualify for the credit is $10,000 per employee per quarter (including allocable group healthcare costs). The credit is increased from 50% to 70% of such qualified wages, and accordingly an eligible employer can claim up to a maximum of $7,000 per employee in payroll tax credit per quarter – for a total of $14,000 per employee through the first two quarters of 2021.
Advance Credit Payments
Effective January 1, 2021, employers with 500 or fewer employees can claim an advance payment of the credit of up to 70% of average quarterly wages in the corresponding quarter in 2019. Any excess advance received will have to be reconciled to the actual and repaid back to the Treasury.
The following example illustrates the contrast between the old and the new law for the same amount of wages paid during 2020 and 2021, assuming the business satisfied other eligibility requirements during each period:.png)
Key Takeaways
As the new law opens the doors for PPP loan borrowers to look back at 2020; businesses that did not (or could not) take advantage of the ERC in 2020 should review their payroll costs for 2020 and determine any qualified wages under the original law that are in excess of the wages included in PPP loan forgiveness.
Likewise, affiliated businesses that previously could not claim the ERC due to a PPP loan obtained by another affiliate under common control can now consider claiming the credit if they otherwise meet all eligibility requirements.
It appears that the healthcare costs paid for furloughed employees would qualify for this credit even though there are no accompanying wages associated with such healthcare costs.
Employers can also consider paying out bonuses during the first two quarters of 2021 to maximize the credit allowed under the new law’s maximum credit limit.
Unlike year-end tax credits, the ERC can be taken immediately and bring timely financial relief to your business when it needs it the most.
