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 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.
So take a few minutes to learn how you may have thousands of dollars in unclaimed prior quarter tax credits waiting for you to claim them. Think of this as a holiday gift. 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, then you can take a credit for wages paid to your employees 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 period of the suspension order 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.
Law Before the Holiday Gift
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.
Tax Year 2021 Changes
First, and most important, Congress extended the employee retention credit to wages paid through June 30, 2021.
Effective January 1, 2021, employers are eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar quarter in 2019.
Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts.
In addition, for the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
Effective January 1, 2021, the new law changed the definition of qualified wages to provide:
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
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. You may, as a PPP recipient, qualify to take the employee retention credit retroactively for tax year 2020 quarters and also 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 business experienced (a) a full or partial suspension of the operation of its trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or (b) a decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar 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.
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