Employee Retention Credit – 2021 Edition

By Andrew Smith January 7, 2021

(A Payroll Tax Credit for Employers Impacted by COVID-19)

The Consolidated Appropriations Act (the Act) extends and expands the Employee Retention Credit (ERC) that was introduced by the CARES Act and was set to expire on December 31, 2020. It does so (1) by providing favorable retroactive changes to 2020 and (2) by extending the credit (with some new characteristics) to payroll costs incurred in part of 2021. The changes that impacted 2020 were discussed in an article posted earlier this week. The extension of the credit to 2021 costs is the focus of this article.

The “new” ERC for 2021 provides eligible employers (including tax-exempt organizations) with a credit against their Section 3111(a) payroll taxes – only the employer’s “match” (not the employee’s withholdings), and only the 6.2% Social Security Tax (not the 1.45% Medicare Tax). The credit applies to 70% (up from 50% in 2020) of the qualified wages paid to each employee in a quarter (including certain health care expenses), up to a maximum of $10,000 in wages for each eligible calendar quarter (formerly capped at $10,000 in total). The credit applies to costs incurred from January 1, 2021 through June 30, 2021, and is applied against the employment taxes owed, as reduced by other credits (including the employment credits from the Families First Coronavirus Response Act). In the event the Employee Retention Credit exceeds the employment taxes for the quarter, the excess amount will be refunded to the employer. For employers with fewer than 500 employees in 2019, the credit takes into account all qualified wages up to the $10,000 limit per employee. (Note that the headcount measurement increased to 500 from the 100 that applied to the prior version of this credit, but it remains a snapshot of 2019 headcount. If the business did not exist in 2019, 2020 may be used.) In instances where employers have more than 500 employees, qualified wages are limited to wages paid to employees who are unable to provide services. Also under the Act, employers may now take advantage of both the ERC and loans received under the Payroll Protection Program – a pairing that until now was prohibited.

Employers can become eligible for the credit in a quarter using either one of two alternative ways:

1. They must have been carrying on a trade or business during calendar year 2020, but had operations fully or partially suspended during a 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 COVID-19, or
2. The employer must have experienced a significant decline in gross receipts as a result COVID-19 disruptions. In turn, a qualifying decline in a quarter may be achieved in one of two ways:

(a) For any of the first two quarters in 2021, earning revenues in that quarter that were 80% or less than those earned in the same quarter in 2019; or

(b) Performing the same test as in (a) above, but using the immediately preceding quarter, compared to its corresponding quarter in 2019.

In other words, a quarter can qualify by looking to its own quarter or the previous quarter, in either case looking for a 20% drop in revenue compared to what it experienced exactly two years earlier. Note that 2020 is omitted in the comparisons immediately above; the focus instead is on a “normal” year (2019) vs. an impacted year (2021). However, if a business did not exist in a 2019 quarter, its 2020 counterpart may be used in the computation.

Coordination with PPP Loans

Under the earlier CARES Act, employers that applied for and received PPP Loans were not eligible to take advantage of the ERC. However, the Consolidated Appropriations Act eliminated this prohibition retroactively for 2020 and prospectively for 2021. However, the same expenditure cannot be used to generate both benefits (employers may not claim the ERC for wages being paid with PPP Loan funds). As described in a late December article, the recent Act offers some rejuvenated PPP loans – for first-time participants and for certain eligible employers in need of a second draw. The periods in which the PPP funds must be spent overlap part of the period for which the 2021 ERC is available, and this raises some planning opportunities for employers who want to maximize the benefits through careful timing.

The expanded and enrichened ERC has the potential to help many employers impacted by the pandemic. It also comes with an increased level of complexity and multiple sets of rules and options. We anxiously await further expected guidance from the SBA/Treasury Department on the interplay of qualified expenses for PPP Loan forgiveness and qualified wages for the ERC, as well as other aspects of this bill.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.