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Blogging Beyond the Numbers

Changes to the Employee Retention Credit Good News for Employers – Allows for Retroactive Tax Credit (or Payroll Tax Refund)
Posted by: Dan Bergs 2 weeks ago

Included in the COVID Relief stimulus package signed into law on December 27, 2020 were significant changes to certain payroll tax credits.  Enhancements under the Relief Act, especially to the Employee Retention Credit (ERC), are targeted to those businesses that have experienced declines in revenue or have been “shut down” due to state and local lockdown orders.   

Here is some background on the ERC

Under the CARES Act, the ERC was a refundable tax credit against payroll taxes equal to 50 percent of the qualified wages an eligible employer paid to employees after March 12, 2020 and before January 1, 2021. Companies that took out PPP loans could not participate in this program originally, so the employer benefit was severely limited. However, under the NEW stimulus bill, changes to the ERC rules now allow companies that had PPP loans to claim this payroll tax credit.

ACTION IDEA #1:  Companies can “fix” their 2020 payroll tax reporting to capture these new law changes by reporting the qualified wages and health insurance costs on the fourth quarter Form 941 (i.e., rather than amending previous quarters). We advise that you not rush to file your 4th Quarter Form 941 until you have reviewed these new rules and have completed an analysis to see if you will qualify for any missed payroll tax credits. Bottom line – an employer may pay less in Q4 payroll taxes or have an opportunity to get refunds.    

ACTION IDEA #2:  Going Forward, employers will need to track qualified wages and health insurance costs for 2021 payroll so they can claim the ERC tax credits timely on Q1 and Q2. If they use an outsourced payroll provider, make sure they are made aware and are tracking all qualified wages as incurred.   

Old Law vs New Law

Let us dig into some comparisons between the “original” ERC and the modifications made to the “new and improved” ERC.

 OLD ERC RulesNEW ERC Rules
How do I qualify for the credit?1. Business operations must be either fully or partially suspended by a COVID-19 governmental authority shutdown for any quarter in 2020 OR
2. For any quarter in 2020, gross receipts are less than 50% of gross receipts for the same quarter in 2019. Companies can continue to claim the credit until gross receipts in the prior year quarter are more than 80% of what they were in 2019.
1. Business operations must be either fully or partially suspended by a COVID-19 governmental authority shutdown for any quarter in 2021 OR
2. For any quarter in 2021 prior to July 1, gross receipts are less than 80% of gross receipts for the same quarter in 2019.
Is there a limitation based upon number of employees?Employers with greater than 100 employees – no credit available for employee performing services. (Only for paying employees to not work). Employers with 100 employees or less were eligible for the credit even if the employee was working.Employee threshold raised to 500 employees from 100 in 2021. Companies with 500 or fewer employees will be eligible for the credit even if employees are working.
When is credit available?For qualified wages paid after March 12, 2020 and before Jan 1, 2021For qualified wages paid after March 12, 2020 and before July 1, 2021
What is the amount of the credit?Credit is 50% of the qualified wages paid to the employee plus cost of health benefits provided to the employee.Starting on January 1, 2021 the credit is 70% of qualified wages plus cost of health benefits provided to the employee.
Is there a maximum amount for the credit?Credit capped at $5,000 per employee in 2020. Credit capped at $7,000 per employee per quarter (1Q + 2Q). Total credit could be $14,000 per employee.
What if my business took out a Paycheck Protection Program (PPP) loan?A company that received a PPP loan was ineligible for the employee retention credit. A company taking a PPP loan can also claim the employee retention credit, but the claimed wages for the credit cannot be wages paid from a PPP loan that has been forgiven. This change is retroactive for wages paid after March 12, 2020.
What if my business wants these credits in advance?No option to accelerate credits. The Treasury Department has been tasked with providing guidance on accelerating the credits for employers.
What if my business has paid hazard pay to employees?Not available to any federal, state, or local governmental entity. An exception is allowed as of January 1, 2021 that will allow the credit for state or local run colleges, universities, and organizations providing medical care.
Who is disallowed for the credits?Not available to any federal, state, or local governmental entity. An exception is allowed as of January 1, 2021 that will allow the credit for state or local run colleges, universities, and organizations providing medical care.

There is still some additional guidance needed for the ERC.   Stay tuned as the IRS will certainly implement additional procedures for the ERC.

Changes to Family First Coronavirus Response Act – Sick Leave and Medical Leave

The Family First Coronavirus Response Act (FFCRA) has been expanded until March 31, 2021 for employer payroll tax credits for emergency paid sick leave and emergency family medical leave expansion. There are no changes to qualifications or credit amounts. Simply the expansion allows employers to allow these benefits and still receive tax credits through the first quarter of 2021, but it is not mandatory.

View our previously recorded webinar where we discussed the ERC and answered some questions you may have. This is a significant opportunity for businesses to help recoup employee costs while they have declines in revenue. Further guidance is likely to be issued in the coming weeks and months for claiming these credits.

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