PPP2 is making big headlines, but there’s another program in the new COVID relief bill that’s not getting much attention.
The Employee Retention Credit is now available to more small business employers. While this program was part of the original CARES Act, many businesses weren’t eligible to participate due to restrictions on using both PPP funds and the Employee Retention Credit. However, with the new Consolidated Appropriations Act, there are meaningful changes to the Employee Retention Credit program that makes it accessible to more small businesses needing economic relief due to COVID-19.
In a nutshell, the Employee Retention Credit allows eligible employers to take a refundable credit on their quarterly 941 employment tax return, up to a maximum percentage of qualified wages. Under the CARES Act, this program was restricted so that if a business received a PPP loan, it was not eligible for the Employee Retention Credit.
However, the new relief bill made significant changes to this program. Most notably, the restriction that employers can not have both a PPP loan and use the Employee Retention Credit was rescinded retroactively to the effective date of the original CARES Act. While employers still cannot use wages that are covered under a PPP loan to apply for the Employee Retention Credit, wages paid in excess of those covered under PPP forgiveness are eligible. In addition, in 2021 the amount of revenue decline required to be eligible for the program is reduced, while the maximum amount of credits available per employee is increased.
A High-Level Overview of the Employee Retention Credit in 2020 vs 2021:
For 2020:
- Employers must have a 50% decline in gross revenue for any quarter, as compared to the same quarter in 2019.
- Employers can claim a 50% credit on up to $10,000 in annual qualified wages, for a total of $5,000 credit per employee for the year.
- Employers must have a 20% decline in gross revenue, as compared to the same quarter in 2019.
- Employers can claim 70% credit on up to $10,000 in quarterly qualified wages, for a total $7,000 per employee per quarter.
- The program runs through Q2 2021, for a potential total credit of $14,000 per employee in 2021.
With the employee retention credit, employers do not need to make any type of certification that the credit is necessary due to economic uncertainty. Employers also don't need to apply for forgiveness. The credit is taken with the quarterly 941 payroll filing and first applied to any balances due, with credit overages refunded to the business.
A Detailed Comparison of the Employee Retention Credit in 2020 vs. 2021:
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Item |
Original CARES Act, 2020 |
Consolidate Appropriations Act, 2021 |
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Qualified Wages
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Wages paid after March 12, 2020 and before January 2021, including the cost of health benefits. Wages paid for compliance with the Paid Family and Medical Leave Act are excluded.
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Wages paid after March 12, 2020 and before July 2021, including the cost of health benefits. Wages paid for compliance with the Paid Family and Medical Leave Act are excluded.
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Eligible Businesses
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Businesses fully or partially suspended by government mandate, or gross receipts less than 50% of same quarter in 2019 (50% decline in revenue).
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Businesses fully or partially suspended by government mandate or gross receipts less than 80% of same quarter in 2019 (20% decline in revenue).
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Percentage of Wages
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50% of qualified wages.
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Beginning January 1st, 2021, the credit is 70% of qualified wages.
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Max Credit Amount
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Annual cap of $5,000 per employee ($10,000 in qualified wages x 50%).
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Beginning Jan 1st, 2021, the cap increases to $7,000 per employee for the first two quarters of 2021 ($10,000 in qualified wages x 70%) for a possible credit of $14,000 per employee. The 2021 credit is available even if the employer received the $5,000 maximum credit in 2020.
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Employer Size and Working vs. Non-Working Employees
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Employers who had 100 or fewer employees are eligible for the credit, regardless of whether the employee was working or furloughed. A company with more than 100 employees can not take the credit for wages paid if the employee was performing service.
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Beginning Jan 1st, 2021 an employer with 500 or fewer employees will be eligible for the credit even if the employee is working.
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PPP Loan
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A company that received a PPP loan was not eligible for the Employee Retention Credit. THIS HAS BEEN REPEALED
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** CHANGE RETROACTIVE to the effective date of the original law for wages paid after March 12th, 2020** A company that received a PPP Loan is no longer prohibited from claiming the Employee Retention Credit. However, employers may not use the same wages in calculating the Employee Retention Credit as they do for calculating PPP forgiveness. A company that received a PPP loan and paid qualified wages in excess of the amount of the forgiven PPP loan can claim the credit retroactively.
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Claiming the Credit
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The credit is taken on the quarterly 941 employment tax return. Eligible employers report total qualified wages and related health insurance costs. The credit is taken against the employer’s share of social security tax, but the excess credit is refundable to the employer. If a credit is expected, employers may withhold depositing taxes during the quarter in advance of the credit, without penalty.
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No change in the filing process, however if an employer was eligible for the credit in 2020, but did not apply based on the stipulations under the original CARES Act, an employer may file an amended 941 to receive credits now made eligible under the Consolidated Appropriations Act.
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Is your business eligible for the Employee Retention Credit, but you're not sure where to start? We are here to help. Contact us today.
