December 30, 2020
The Employee Retention Tax Credit (ERTC) has been impacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA). Below is an analysis of these changes:
CARES Act:
The CARES Act provided a refundable payroll credit equal to 50% of “qualified wages” paid or incurred by eligible employers to employees after March 12, 2020 and before January 1, 2021.
The credit was to be claimed on a quarterly basis. It was available to employers carrying on a trade or business during calendar year 2020 and whose 1) Operations are fully or partially suspended due to a COVID-19 related shutdown order, or 2) Incurred a gross receipts decline of more than 50% as compared to the same calendar quarter in the prior year.
Qualified wages defined:
- In the case of employers with more than 100 full-time employees, qualified wages are wages paid when they are NOT providing services due to COVID-19.
- In the case of employers with less than 100 full-time employees, all employee wages qualify for the credit – whether the business was subject to a shutdown order or was open during the covered period.
- The amount of wages considered in determining the credit was limited to $10,000 per employee (maximum credit per employee of $5,000). Further, employers with a PPP loan were not eligible for the employee retention credit.
The Consolidated Appropriations Act (CAA) makes the following changes:
- The credit is extended from December 31, 2020 to June 30, 2021.
- The credit percentage is increased from 50% to 70%.
- The per-employee limitation has been increased from $10,000 in total to $10,000 per quarter.
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The employee threshold when defining “qualified wages” has increased from 100 to 500 employees. Employers with more than 500 employees may claim the credit only for employees who are paid not to work.
- An eligible quarter requires a decline in gross receipts of more than 20% rather over 50%.
- Only for 2021 – a calendar year quarter may be compared to one of the same quarters in 2019. For example, Q1 2021 can be compared to Q1 2019 and Q2 2021 may be compared to Q2 2019.
- Rules have been provided allowing employers that were not in existence for all or part of 2019 to be able to claim the credit. If the business did not exist in 2019, then a quarter in 2021 will be compared to the same quarter in 2020.
- The above changes apply to calendar quarters beginning after December 31, 2020.
- Employers who receive PPP loans may still qualify for the ERTC with respect to wages that are not paid with forgiven PPP proceeds (retroactive to the effective date of the CARES Act).
- Small employers may now receive the credit (immediate cash flow benefit) by reducing their required payroll tax deposits. If an employer has fewer than 500 employees, then it may elect in that quarter to receive a credit not to exceed 70% of the average quarterly wages paid by the employer in 2019 (yes, 2019). The credit would then be reconciled against the final credit. If the advance credit exceeds the final credit, then the employer’s payroll tax balance due will be increased by the shortfall.
Stay safe,
David Greberman, EA, MST MST
Director - Tax Services
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
