When Congress passed the CARES Act in March 2020, most businesses took advantage of the Paycheck Protection Program (PPP) loan to help keep them afloat.
Congress also authorized a second option to help employers—an employee retention credit fully refundable against the business’s payroll tax liabilities.
Since a business could do only one or the other, many businesses passed on the employee retention credit.
But now, retroactive to the enactment of the CARES Act in March 2020, thanks to the new COVID-19 relief law, an employer who has or had the PPP in hand can do both the PPP loan and the employee retention credit.
Looking forward to 2021, Congress made the employee retention credit easier to claim and increased the dollar amount of your cash benefits.
The new COVID-19 relief law was enacted on December 27, 2020. And this holiday cash gift is only part of the story. In 2021, you will find that the new law multiplies your possible employee retention tax credits by 2.8.
Employee Retention Credit 101
The CARES Act gives you, if you are eligible, a refundable tax credit against the employer portion of the Social Security tax equal to 50 percent of wages paid to your employees on or after March 13, 2020, through December 31, 2020.
You are eligible for this credit if
- a government order fully or partially suspended your operations during a calendar quarter due to COVID-19 (you have a high likelihood that you suffered this problem), or
- your gross receipts for a calendar quarter are less than 50 percent of gross receipts from the same quarter in tax year 2019, in which case your credit ends in the quarter when gross receipts exceed 80 percent of gross receipts from the same quarter in the prior year.
Your qualifying wages for the credit depend on the size of your business:
- If you had more than 100 full-time employees in 2019, you can take a credit for your employees’ wages paid when they are not providing services due to either the suspension or decreased business.
- If you had 100 or fewer full-time employees in 2019, then all your employee wages qualify for the credit during the suspension order period or if you are using the gross receipts test for the entire quarter.
The maximum creditable wage amount is $10,000 per employee for all calendar quarters in tax year 2020, and the definition of wages includes the value of the health benefits you pay on your employee’s behalf.
Businesses that selected the PPP option could not claim the employee retention credit.
Holiday Gift—Retroactive Changes
In the new COVID-19 relief law enacted on December 27, 2020, lawmakers made two changes retroactive to March 13, 2020:
- PPP loan recipients can use the employee retention credit for wages not paid with forgiven PPP loan proceeds.
- Group health plan expenses are now considered qualified wages even if no other wages were paid to the employee (this codified the IRS’s position all along).
Since the change is retroactive as if it were in the CARES Act, you may have unclaimed employee retention credit amounts all the way back to the first quarter of 2020. To claim those missed credits, you will need to amend your payroll tax returns using IRS Form 941-X.
IRS troubles? If you have unpaid payroll tax bills from prior quarters, your amended returns could reduce penalty and interest charges on those quarters, granting you even more cash.
Tax Year 2021 Changes
First and most important, Congress extended the employee retention credit to wages paid through June 30, 2021.
For the two quarters in 2021, Congress increased the credit amount and made it easier for employers to claim the credit with the following changes:
- The credit rate increases from 50 percent to 70 percent of qualified wages.
- The maximum creditable wage amount increases to $10,000 per employee per quarter (versus per year).
- You qualify for the credit if your gross receipts for a calendar quarter are less than 80 percent of gross receipts from the same quarter in tax year 2019.
- Alternatively, you can elect to qualify for a quarter by comparing the immediately preceding quarter’s gross receipts to the corresponding quarter in 2019.
- The relaxed requirements for qualifying wages apply to businesses with 500 or fewer full-time employees in 2019.
There is one new wrinkle: an employer cannot receive advance payments of the employee retention credit unless the employer has 500 or fewer employees.
Important note. The changes listed in this section apply to the 2021 quarters only. 1
Before the December 27, 2020 enactment of the new COVID-19 relief law, you may have chosen the PPP and given no thought to the employee retention credit.
Remember, under the original law, you had to choose between the retention credit and the PPP loan. Millions chose the PPP loan route.
But now the game has changed. As a PPP recipient, you may qualify to take the employee retention credit retroactively for tax year 2020 quarters and going forward in tax year 2021.
Here are the key changes you as a PPP player need to know:
- PPP loan recipients can retroactively claim the 2020 employee retention credit for wages not paid with forgiven PPP loan proceeds.
- Wages paid from March 13, 2020, through December 31, 2020, qualify for the retroactive credit.
- Wages paid from January 1, 2021, through June 30, 2021, can qualify for the more significant 2021 credit.
- For 2021 quarters only, you qualify for the credit if your gross receipts for a calendar quarter are less than 80 percent of gross receipts from the same quarter in tax year 2019.
- Alternatively, you can elect to qualify for a quarter by comparing the immediately preceding quarter’s gross receipts with the corresponding quarter in 2019.
- For 2021 quarters only, the relaxed requirements for qualifying wages apply to businesses with 500 or fewer full-time employees in 2019
This year tax matters are more complicated than in previous years. Contact us if you need help with the Employee Retention Credit or other tax matters.