New Rules for the Employee Retention Tax Credit

The Consolidated Appropriation Act, 2021 was signed into law on December 27, 2020. This law clarifies and expands the employee retention tax credit (ERTC) enacted under the CARES Act. A key retroactive change is that employers who took PPP loans are now eligible to take the employee retention credit, so long as the same wages are not used for both.

Employee Retention Tax Credit Rules For 2020:

The credit provides a 50% tax credit up to $10,000 on qualified wages paid to the employee from 3/2/2020 to 12/31/20. The credit is available to all employers regardless of size including tax exempt organizations. There are only two exceptions: (1) state and local governments and their instrumentalities and (2) small businesses who take Small Business Loans.

Qualifying wages are all wages including health care costs that were paid to employees by employers who meet one of two alternative tests. The tests are calculated each quarter:

  1. the employer’s business is fully or partially suspended by government order due to Covid-19 during the calendar quarter or
  2. For any quarter in 2020, the employer’s gross receipts are below 50% of the comparable quarter in 2019. Once this happens, every quarter is an “eligible quarter” until the END of the quarter in which the business’s receipts have returned to at least 80% of what they were for the same quarter in 2019.

Under the 2020 rules for a company with more than 100 full time employee equivalents (FTES), no credit was available for wages paid to an employee performing services for the employer. If the employer had 100 or fewer employees on average in 2019, then the credit is based on wages paid to all the employees. If employees worked full time and were paid full time work, the employer gets the credit on those wages, as well as, any wages paid to employees who did not work.

Therefore, if you have LESS than or equal to 100 average monthly full time employee equivalents (FTES) for 2019, then ALL wages paid to an employee during an eligible quarter can give rise to the credit, even if the employee worked. For a company with more than 100 employees, the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

Employee Retention Tax Credit Rules For 2021:

Effective January 1, 2021, the credit amount is increased to 70% of qualified wages, which is includes the cost to continue providing health benefits.

Effective January 1, 2021, the credit is increased to $7,000 per employee for each of the first two quarters of 2021($10,000 in qualified wages x 70% tax credit rate), so that the maximum credit for 2021 will be $14,000 per employee.  This credit is available even if the employer received the $5,000 maximum credit for wages paid to such employee in 2020.

Effective January 1, 2021, business operations must meet one of these tests: (1) business operations must be either fully or partially suspended by a Covid-19 lockdown order, or (2) for a quarter in 2021, if gross receipts are less than 80% of gross receipts for the same quarter in 2019 are eligible for the credit.

Effective January 1, 2021, this threshold will be raised to 500 employees, so that for the first quarter of 2021, a company with 500 or fewer employees will be eligible for the credit, even if employees are working.

The Treasury will draft guidance to allow an advance payment of the credit for companies with 500 or fewer employees, based on 70% of average quarterly payroll of the same quarter in 2019.  If the amount of the actual credit determined at the end of the quarter is less than the amount of the advance payment, the company will need to repay the excess to the government.

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