Extension and Expansion of the Employee Retention Credit
In case you missed it, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (CAA, 2021). The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the Employee Retention Credit (ERC) provided by the CARES Act until June 30, 2021.
Beginning on January 1, 2021, and through June 30, 2021, TCDTR extends and expands the following CARES Act provisions:
- Increases the ERC rate from 50% to 70% of qualified wages,
- Expands eligibility for the credit by reducing the required year-over-year gross receipts declined from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility,
- Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter,
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees,
- Provides that employers who receive a Paycheck Protection Program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds.
The first step in determining whether your company can take advantage of the ERC is to ascertain whether your company is an “Eligible Employer” as defined by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. To meet the definition of Eligible Employer, your company must have experienced the following:
- Business operations were fully or partially suspended by a government order related to COVID-19 during the calendar quarter; or
- A significant decline in gross receipts – Under the new legislation, which is effective for calendar quarters beginning after December 31, 2020, a significant decline occurs when an employer’s gross receipts decline by 20% of what they were for the same calendar quarter in 2019.
Upon determination that your company meets the Eligible Employer definition, the next step in the analysis is to determine the “Qualified Wages” that your company paid. The Qualified Wages form the basis of the ERC amount a company can claim. The new legislation is effective for calendar quarters beginning after December 31, 2020. The determination of Qualified Wages is different depending upon whether your company has 500 employees or more (increased from 100 employees).
- More than 500 employees – If your company has more than 500 employees, the credit is available only for compensation paid to employees who are not working due to the situations described above.
- Fewer than 500 employees – If your company has 500 or fewer employees, any compensation paid during the period when operations were affected by one of the two scenarios above is eligible for the credit, whether the employees were working or not. Some analysis must be done to properly determine the number of employees a company employs for purposes of the 500-employee threshold.
Claiming the ERC
An Eligible Employer claims the ERC by reducing a quarter’s required payroll tax deposits on its Form 941. Initially, the ERC is applied against the 6.2% employer’s share of social security taxes due on all wages paid to all employees for the quarter. Notes:
- If an ERC is more than that amount, the ERC may offset against the rest of the payroll tax liabilities on Form 941 for the quarter.
- If the ERC exceeds all payroll tax liabilities, the company may receive a refund.
- If a company determines that it was an Eligible Employer for a previous quarter, and has already filed its Form 941 for that quarter without claiming an ERC, the company may file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the quarter in question to claim the credit.
Please contact your BKM Sowan Horan advisor to discuss eligibility and what we can do to help you apply for the ERC.