The Employee Retention Credit and The Consolidated Appropriations Act

The Employee Retention Credit, a provision of the CARES Act, has been extended under the Consolidated Appropriations Act of 2021. It is now available through June 30, 2021, and is available for all employers who have retained their employees throughout the COVID-19 pandemic. The new extension will help businesses deal with the financial havoc resulting from the pandemic.

Employers now have until June 30, 2021, to claim tax credits on wages they have paid to employees retained during the crisis. Another significant change introduced by the law is that tax credits will be available to businesses that took loans under the Paycheck Protection Program (PPP) and hadn’t been eligible to claim these tax credits.

The credit may be applied to wages that haven’t been or aren’t expected to be forgiven under the PPP guidelines. Federal agencies will provide guidance to clarify which wages can be considered by PPP recipients for the retention credit.

What Is the Employee Retention Credit?

The Employee Retention Credit is a tax credit for employers that have kept their employees employed during the Coronavirus pandemic. Despite reduced or non-existent business, these employees kept paying their workers. Qualified employers, including many that received PPP loans, may claim 50% of up to $10,000 per employee for wages paid between March 13 and December 31, 2020.

What’s New in 2021 for the Employee Retention Credit?

For 2021, the new law increases the credit to 70% of the qualified wages paid. Additionally, the amount has been changed from $10,000 annually to $10,000 per quarter for the first two quarters of 2021. Simply put, employers can claim $7,000 per employee for Q1 and Q2 in the 2021 fiscal year.

What Are the Qualification Requirements for Employers?

The new changes to the Employee Retention Credit mean that most employers and tax-exempt organizations will have no problems qualifying for the tax credit. There are two eligibility requirements.

  1. A business or trade was partially or entirely closed due to government restrictions. With a partial closure, the credit is only applicable for that period, not the entire quarter.

According to the IRS, businesses that closed their stores but continued operations from home do not qualify. However, these businesses may still be eligible for the credit if they meet the second criteria.

  1. Any employer whose quarterly gross receipts were less than 80% of the gross receipts compared with the same quarter in 2019. They wouldn’t be eligible if their gross receipts exceeded 80% compared to the same quarter in 2019.

Beginning in 2021, the new law states that businesses would qualify if they suffered due to closures and have seen a reduction of more than 20% in gross receipts in the quarter compared to the same quarter in 2019.

If employers find out later that they have qualified for the credit, they can change their Form 941; This is retroactive to March 12, 2020. The IRS allows new businesses to use gross receipts for the quarter they established their business as an analog for any quarter they don’t have any figures for in 2019.

Wages that Qualify in the Retention Credit

Compensation or wages subjected to FICA taxes and qualified health expenses will qualify when calculating the employee retention credit. These should have been paid after March 12, 2020, and will be eligible for the credit if paid until June 30, 2021. It’s important to note that the wage threshold, along with the credit percentage, will increase in 2021.

The IRS has different methods of determining which health expenses qualify. In general, these include the employee and employee pretax portion, not post-tax amounts. When calculating qualified wages for inclusion, employers must determine how many full-time employees they had on their books in 2019. All employers with more than 100 full-time employees will use different qualified wages than those with fewer full-time employees.

The new law states that the employee limit used for determining the wages to which the credit can be applied has increased to 500 in 2021. For calculating the employee retention credit, we define a full-time employee as someone who worked 30 hours per week or 130 hours a month in 2019.

  • Employers who operated the entire year will take the total number of full-time employees each month and divide it by 12.
  • Employers who established their businesses mid-year can calculate the number of full-time employees by taking the total number of full-time employees each month and divide it by the number of months they operated.

Employers will calculate full-time equivalent (FTE) employees used in the report for PPP forgiveness differently than full-time employees in the employee retention credit. Accounting professionals are advised not to share PPP Forgiveness FTE information with their clients. Even if an employer has taken a PPP loan and received forgiveness for the loan, they could still be eligible for the employee retention credit on some wages.

When employers calculate their full-time employees, they need to know which qualified wages they can use. Businesses with more than 100 full-time employees can only use the wages of employees who aren’t actively working due to a decline in business or suspension. Wages paid for sick or vacation days don’t count as qualified wages for large employers. It means employers can only use the credit for employees who aren’t working.

Employers with 100 or fewer full-time employees may use all their employee wages, including those working and time paid when not at work except for paid leave given by the Families First Coronavirus Response Act. The IRS has protections for preventing wage increases, which will count to the credit when the employer qualifies for employee retention credit.

  • No double-dipping is allowed for credits. Any employer that has taken employee retention credit can’t take the credit for qualified wages and paid family medical leave.
  • Employers can’t include those workers included in the Work Opportunity Tax Credit in the employee retention credit.

Employers deciding which credits they should take should speak with their accounting professionals.

What Do the Changes to Employee Tax Retention Will Mean for Employers in 2021?

Changes to the employee tax retention credit in 2021 include the effective dates and an extension of the employer’s ability to use the employee retention credit. A significant change is that the employee retention credit was 50% of the health plan costs and qualifying wages in 2020 but has been increased to 70% of the health plan costs and qualifying wages in 2021.

The limitation on the wages paid to employees has also changed. Previously, it was $10,000 per employee between March 13th and December 31st. It is now $10,000 per employee, per quarter, until June 30th, 2021.

The requirements to demonstrate a reduction in gross receipts have shrunk to  20% compared to the same quarter’s gross receipts in 2019. If the employer didn’t exist in 2019, the gross receipts for the same quarter in 2020 will suffice as a point of comparison. Employers can now use the gross receipts based on any quarter rather than only using the immediate quarter’s gross receipts in the previous year.

Employer size eligibility requirements have also changed. In 2021, businesses that employed more than 500 employees in 2019  are only eligible for the employee retention credit if they closed or limited operations due to coronavirus.

Businesses that employed less than 500 people in 2019 will use those 2019 numbers to estimate any 2021 quarters in which the business is partially or entirely closed. Wages paid to employees in the equivalent 2019 quarter will be used to calculate the credit. This amount won’t include any wages paid through the FFCRA payment for required paid sick leave under the Emergency Paid Sick Leave Act (EPSLA) for any of the reasons below:

  1. Any employee who had to follow local, federal, or state quarantine and isolation orders due to the coronavirus.
  2. An employee was directed by a healthcare professional to self-quarantine if they had caught coronavirus.
  3. Employees who experience symptoms related to coronavirus and are looking for medical diagnosis under the FFCRA.

If employers choose to receive funds in advance, they will need to settle the credit they have claimed for their payroll tax reforms along with any funds that they received. Employers who use different vendors for payroll services should understand that the instructions and forms require that the business owner is ultimately responsible for the employee retention credit’s accounting. They will also be held liable if they claim credits improperly, as they need to be a certified organization to claim the credit.

Conclusion

With the new rules coming into effect, employers who have suffered from prolonged shutdowns or other forms of economic decline are encouraged to re-evaluate how they will use the employee retention credit to their benefit. Most employers, particularly those with 100 to 500 employees, will find that the new rules extend the program to benefit them as well. They can use these to their advantage and offset the adverse economic conditions that coronavirus has had on their business operations.