By: Irina Moyseyenko, CPA, MT
The recently passed legislation, the Consolidated Appropriations Act, 2021 (CAA), made changes to the Employee Retention Credit (ERC). This credit, created as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020, provides a refundable payroll tax credit to businesses that were fully or partially shutdown in at least one quarter or had a significant drop in gross receipts in any quarter in 2020 as compared to 2019. Today we will discuss how the CAA affected the ERC.
Taxpayers that received Paycheck Protection Program (PPP) loans are now eligible to claim the ERC for 2020, if other eligibility guidelines are met. Note that wages used for payroll costs for the PPP loan forgiveness computation cannot be used for ERC (i.e., no double dipping).
The CAA improved the ERC by making the following changes:
- The credit is extended from December 31, 2020, until June 30, 2021.
- The maximum credit increased to 70% of wages paid to employees up to a maximum of $10,000 per employee for each quarter. The maximum credit per employee is now $14,000 instead of $5,000.
- Quarterly gross receipts must decline at least 20% as compared to the same quarter in 2019 to be eligible under the significant decline in receipts test. The taxpayer can choose to compare receipts in the previous quarter to their 2019 receipts to be eligible for the credit in the subsequent quarter. For example, to determine eligibility in Q1 of 2021, the taxpayer can either compare 2021 Q1 receipts to 2019 Q1 receipts or 2020 Q4 receipts to 2019 Q4 receipts.
- If the employer has 500 or fewer employees, wages paid to employees whether they are providing services or not, will be eligible. The previous threshold was 100 or fewer. For employers with more than 500 employees, only wages paid to employees for not performing services for the employer would qualify.
For those taxpayers that received PPP loans in 2020, review your eligibility for the ERC for 2020. If you are eligible, you can use the 4th Quarter 2020 Form 941 to catch up on the credit for 2020. If not claimed on the 4th Quarter 2020 form, a previously filed quarterly payroll report can be amended to take advantage of the credit. The IRS should be coming out with additional guidance for PPP recipients to claim this credit for 2020.
For all taxpayers, review your eligibility for this credit for each quarter going forward and notify your advisors or payroll company if eligible. Your federal payroll tax deposits can be reduced in anticipation of this credit, creating immediate cash flow, or you can claim the credit on your quarterly payroll tax reports and request a refund.
If you need help calculating the Employee Retention Credit for your business, call on us. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how economic relief provisions may affect your tax filings, payments, and planning. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.