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 employee retention credit is designed to encourage businesses to keep workers on their payroll and support small businesses and nonprofits through the Coronavirus economic emergency.
Eligible employers may claim the credit against employment taxes equal to a percentage of qualified wages paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts. Based on the changes to the CARES Act, there may also be new opportunities to claim this credit retroactively for wages paid after March 12, 2020.
Claiming the Credit for 2021 Wages – Up to $7,000 per employee
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 are wages paid between March 12, 2020, and July 1, 2021, extended from January 1, 2021.
In addition, the definition of an eligible employer is more inclusive under the Consolidated Appropriations Act, 2021 and thereby allows a greater number of employers to qualify.
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 20% decline (down from 50%) in gross receipts for the calendar quarter compared to the same quarter in 2019.
However, if the employer was not in existence as of the beginning of the same calendar quarter in 2019, then the employer may use the same calendar quarter in 2020. Employers also have an election to determine if they meet the gross receipts test based on the immediately preceding quarter.
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.
There are special rules for seasonal workers. If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
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.
Retroactive Changes – Do Your 2020 Wages Now Qualify for Credit Up to $5,000?
The revisions to the employee retention credit no longer excludes Paycheck Protection Plan (PPP) loan recipients from also benefiting from the employee retention credit. This opens an opportunity for employers who passed on the credit to take advantage of the PPP forgiveness to retroactively apply for the credit on 2020 qualifying wages.
The HSC Team is Ready to Help!
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 for 2021 and possibly even go back to harvest credits from 2020 that may now be available. Our HSC team is here to assist you in determining what credits may be available to your business. Please contact your HSC advisor to discuss how the employee retention credit as well as other business tax relief under the Consolidated Appropriations Act, 2021 may benefit your situation.