The Consolidated Appropriations Act, 2021 extends and expands the employee retention credit first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The refundable employee retention credit (ERTC) is designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits through the Coronavirus economic emergency.

The Basics

The ERTC is a fully refundable tax credit for employers that equals a percentage of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees.  For 2020, the credit is equal to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021.  The maximum amount of qualified wages considered with respect to each employee for all calendar quarters is $10,000, where the maximum credit allowed per employee for 2020 is $5,000. 

The ERTC is a fully refundable tax credit for employers that equals a percentage of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees.  For 2020, the credit is equal to 50% of qualified wages paid after March 12, 2020, and before January 1, 2021.  The maximum amount of qualified wages considered with respect to each employee for all calendar quarters is $10,000, where the maximum credit allowed per employee for 2020 is $5,000. 

For calendar quarters beginning after December 31, 2020, the amount of the credit is increased from 50% to 70% of qualified wages. The limitation per employee is also increased from amounts paid up to $10,000 per year to amounts paid up to $10,000 per quarter. Eligible wages for 2021 are wages paid between January 1, 2021, and July 1, 2021.

An eligible employer is defined as:

  • An employer whose trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease (COVID-19); or
  • An employer that experiences a significant decline in gross receipts for the calendar quarter compared to the same quarter in 2019. For 2020, a significant decline in gross receipts begins with the first calendar quarter in which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.  The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of it is gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.  For 2021, the threshold drops to a 20% decline in gross receipts for the calendar quarter compared to the same quarter in 2019.

Qualified wages are based on the business’s average number of full-time employees in 2019.

  • Small employers, those that had 500 or fewer employees (up from 100), may receive the credit for wages paid to employees whether or not they are providing services to the employer.
  • Large employers, those that had more than 500 (up from 100) employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.

Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. They can also request an advance of the employee retention credit by submitting Form 7200.

No Double Benefit

There are limitations when considering an eligible employer’s ability to claim the employee retention credit. This credit is impacted by other credit and relief provisions as follows:

  • wages that are paid for with forgiven Payroll Protection Program (PPP) proceeds cannot qualify for the employee retention credit.
  • qualifying wages for this credit cannot include wages for which the employer received a tax credit for paid sick and family leave; and
  • employees are not counted for this credit if the employer is allowed a work opportunity tax credit.

Because of the enhancements and expansion of the employee retention credit, your business may now have an opportunity to take the advantage of this tax benefit. Please contact us to discuss the employee retention credit and other business tax relief under the Consolidated Appropriations Act, 2021.