The New and Improved Employee Retention Credit
Inside the thousands of pages of legislation in the Consolidated Appropriations Act, 2021 (CAA) there were numerous changes favorable to taxpayers, including the additional round of funding through the Paycheck Protection Program (PPP) and clarification of the loan forgiveness being nontaxable. A major benefit that taxpayers should not overlook is the new and improved employee retention credit (ERC).
While the credit isn’t necessarily new, it is greatly improved and has been extended and modified. Some changes are retroactive to the beginning of the CARES Act, and other changes only apply after January 1, 2021.
One of the biggest changes was to retroactively allow PPP borrowers to qualify for the ERC as long as there is no double counting of the same wages. That is, you can’t use the exact same dollars to qualify for PPP loan forgiveness as you do for the ERC credit. Many taxpayers that have ignored the credit because they took PPP funds should take a second look at the ERC and the possible benefits.
The legislation also extended the ERC through June 30, 2021, and enhanced the calculations for 2021. Some of the prospective changes beginning January 1, 2021, and running through June 30, 2021, include:
- Requisite gross receipts decline threshold is decreased from 50 percent to 20 percent when comparing quarters in 2019.
- Safe harbor to allow employers to use the immediately preceding quarter to determine eligibility.
- Credit percentage increases from 50 percent to 70 percent of qualified wages.
- The limit of wages creditable per employee goes from $10,000 in a year to $10,000 in a quarter.
- The “small employer” designation applies to employers having 500 or fewer employees (as opposed to 100 employees under the CARES Act).
- Employers not in existence in 2019 can claim the credit.
- Certain governmental employers (i.e., state colleges, universities, hospitals) may now take advantage of the ERC.
- 30-day wage limit has been removed to allow for bonuses to be part of the credit.
- Small employers with fewer than 500 employees are permitted to advance the credit at any point in the quarter, estimated based on 70 percent of the average quarterly wages paid in calendar year 2019.
As we will see with some of the additional changes in 2021, many more companies can benefit from the credit.
Are You Eligible?
The ERC is a refundable payroll tax credit for an eligible employer who meets either of the following:
- Had their business fully or partially suspended due to the orders from the Federal or state government limiting commerce, travel, or group meetings due to COVID-19; or
- A business that experienced a significant decline in gross receipts (as compared to the same quarter in 2019) during any quarter (2020 50 percent decline, 2021 20 percent decline).
The first step is to determine if you are an eligible employer based on the above definition. If you are an eligible employer, then you next need to determine if you are a small or large employer. For 2020, anyone with 100 or fewer employees is considered a small employer and everyone else is a large employer. For 2021, the small employer definition has been increased to anyone with 500 or fewer employees.
If you are a small and eligible employer, then all wages paid in that quarter are eligible for a 50 percent credit (70 percent in 2021) except for wages reimbursed by PPP or some other payroll credit program up to a maximum of $5,000 for tax year 2020 and $7,000 per quarter for each of the first two quarters of 2021. The maximum credit in this case is $19,000 per employee.
If you are a large and eligible employer, then only wages you have continued to pay employees who have been furloughed or who are not working would qualify. In some cases, wages paid to employees who continue to work, but at a level below their normal qualifications, may also qualify. For these qualified wages, the same $5,000 maximum credit for 2020 and $7,000 per quarter maximum credit for 2021 would apply.
As you can see, this could be a significant benefit to many companies. If you believe your company may qualify for the ERC, please let us know and we’ll be happy to walk through this in more detail to help you determine if you qualify. Please contact your Brown Smith Wallace advisor or John Schwartze, Tax Principal, at 314.824.5237 or firstname.lastname@example.org.