January 6, 2021

How Employers Can Take Advantage of the Expanded Employee Retention Tax Credit

On December 27, 2020 President Trump signed into law a new relief bill in response to the continuing COVID-19 pandemic. The Consolidated Appropriations Act (CAA) is over 5,000 pages in length and contains provisions to fund government operations, provides economic support to individuals and businesses and includes extensive tax law changes. One significant provision focuses on the changes to the Employee Retention Tax Credit (ERTC) originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Below we dig into the changes and expansions to the ERTC.

QUICK REFRESHER ON THE ORIGINAL ERTC

Before examining the changes to the ERTC, let’s first revisit the provisions in the original CARES Act. Enacted in the spring of 2020, the Act allowed businesses to take a credit against payroll taxes in order to help offset some of the business losses due to COVID-19. The law allowed eligible employers to take a credit of 50% of qualified wages up to $10,000 paid to employees between March 12, 2020 and January 1, 2021.  Consequently, the maximum credit for each employee was $5,000 ($10,000 in wages X the 50% tax credit rate).

However, not every business was eligible for this credit. Businesses must have been significantly impacted by COVID-19 either by a lockdown order or by experiencing a significant reduction in revenue. There were also restrictions on which wages were “qualified” if an employer employed more than 100 people. Businesses were also not allowed to take the credit if they used Paycheck Protection Program (PPP) loans to cover employee payroll costs. Learn more about the original ERTC under the CARES Act.

UPDATES AND EXPANSIONS TO THE ERTC

The passage of the newly signed relief bill is good news to many businesses who continue to feel the economic impacts of the pandemic as the law enhances and expands many provisions of the original ERTC. To start with, the newly enacted law extends the ERTC until June 30, 2021 and increases the tax credit to 70% of qualified wages for each of the first two quarters of 2021. As a result, the maximum credit for each employee in 2021 is $14,000 ($10,000 in wages X the 70% tax credit rate X two quarters).

ERTC Eligibility

More businesses will be eligible for this credit in 2021. The original ERTC was only available for businesses who were forced to shut down or whose gross receipts in 2020 were 50% less than the same quarter in 2019. The new law modifies this reduction in revenue by an additional 30%.  For 2021, the test is satisfied for any of the first two quarters of the year if gross receipts are less than 80% of the gross receipts for same quarter in 2019.

ERTC Wage Threshold

A change in the threshold for determining which wages “qualify” for the tax credit will also benefit employers this upcoming year. Under the old law, for businesses with less than 100 employees all wages qualified for the tax credit, regardless if the employee’s role changed or not due to the pandemic. Whereas businesses with over 100 employees could not claim the credit for employees that were still performing services for the business, even at a reduced capacity. The new law effective January 1, 2021 raises the threshold number to 500 employees. As a result, more wages will become eligible for the tax credit during the first two quarters of 2021.

Employers with PPP Loans

Initially, the CARES Act prohibited employers who had received a PPP loan from also utilizing the ERTC. The new law allows an employer to claim the credit for any wages paid beyond the proceeds of the PPP loan that have been forgiven. This change is retroactive to the effective date under the original law: March 12, 2020. A company that received a PPP loan in 2020 but paid qualified wages beyond the amount of the loan would benefit by filing an amended Form 941 and claiming the credit.

NEW ENHANCEMENTS TO THE ERTC

While many provisions of the CAA enhanced previous law, it also includes some brand new provisions as well. Businesses will now be able to take an advanced payment on their credit even if those wages have not yet been paid. Additionally, some government entities not previously allowed to take the credit are eligible, such as public universities, hospitals, federal credit unions, etc. Another important change is that wages that have been increased due to hazard pay are also now eligible for the ERTC. 

While the above highlights how changes in the recent COVID-19 relief bill have affected the ERTC, please contact an Anders advisor below to discuss your situation and recovery options. Our advisors are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed. Visit our COVID-19 Resource Center for more resources.

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