Claiming an Employee Retention Credit for 2020 + 2021

The new stimulus package passed on December 27, 2020 renewed, extended, and modified many provisions that originated in the CARES Act. Along with a $600 stimulus check for taxpayers and dependents, the new package also included updated tax guidance to help businesses keep their doors open.

Within the Act are significant changes to the Employee Retention Tax Credit (ERC). A long-standing disaster relief element, the ERC established in the CARES Act allowed employers to receive refundable quarterly payroll tax credits on qualified wages paid after March 12, 2020 and before January 1, 2021. The new bill modifies and expands several components of the credit.

Below, we have created a comparison between the ERC for 2020 and the modifications made for 2021.

The first major update in the stimulus bill allows a company that received PPP funds to claim the ERC. This retroactive update allows wages paid after March 12, 2020 to be claimed as part of the ERC. While providing flexibility and additional funding for struggling businesses, employers should note that wages paid with forgiven PPP loan money may not be used for this credit.

These credits can be claimed retroactively, so employers should look into whether they were eligible for 2020 under the new rules as they are filing their final 2020 payroll forms before the end of January.

For businesses looking to maximize these credits and have not yet applied for loan forgiveness, they may want to consider which wages are included as part of their PPP forgiveness application to maximize the credits. Ultimately, each dollar of wages can only be used for one type of government benefit (payroll credits under FFRCA, ETC, FMLA, forgiveness under PPP, income tax credits under WOTC, etc.). There may be some strategy involved in determining which credits to take on wages because not all wages qualify for all options. We recommend consulting with your Aldrich Advisor to optimize available relief for applicable wage expenses if the business has not applied for loan forgiveness and qualifies for the ERC in 2020.

Qualified wages concerning health plan expenses: Health plan expenses can be considered qualified wages even in the absence of other wages. Specifically, group health plan expenses not included in an employee’s gross income may be allocated and included in qualified wages. This is another change that occurred in the new legislation, so even if a business originally claimed the ERC, there might be more credit available to them.

The 2020 ERC: Employers with fully or partially closed operations due to government mandates or those who had a 50% decrease in gross receipts were entitled to claim up to $5,000 per eligible employee (50% of $10,000 qualified wages). Companies with 100 or fewer employees were eligible to receive the full credit, even if staff members were working. Those with more than 100 employees could not receive the credit for wages paid to working employees, even if work is reduced due to slowed business unless the employees were being paid while not working.

The 2021 ERC: Beginning on the first of the year, the employee eligibility threshold increased to 500, and the credit to 70% of qualified wages. Regardless if employees are working, all wages paid are now eligible for the credit for employers with under 500 employees. Additionally, the quarterly cap is now $7,000 per employee for the first two quarters of the year, making the total credit possible $14,000 per employee. The decrease in gross receipts is lower, with a quarter becoming eligible if receipts are less than 80% of the comparable 2019 quarter. Recently, the credit was extended through the third and fourth quarters of 2021. As a result, Businesses can now maximize the credit at $33,000 per employee. For 2020, employers can receive $5,000 per employee in each quarter and $7,000 for 2021.

Implications: This comes as a welcome relief to industries still seeing reduced business due to the pandemic. If you forgot or were originally unable to claim the ERC in a previous 2020 quarter, amendments should be made now as 2020 payroll tax filings are finalized for the 2020 tax year. Similarly, 2021 payroll filings can be amended to take advantage of the ERC. 

Many of the healthcare providers have generally been deemed “essential businesses.” An employer that operates an essential business is not considered to have a full or partial suspension of operations if the governmental order allows the employer’s operations to remain open. However, an employer that operates an essential business may be considered to have a partial suspension of operations under various circumstances. The Internal Revenue Service FAQs provide clarifications specific to businesses deemed essential under the CARES Act to claim the ERC, indicating that a healthcare industry essential business may suffer a partial suspension due to applicable local, county, or state governmental orders.

• FAQ #30 clarifies that an essential business may have a partial suspension if a governmental order suspends more than a nominal portion of its business operations. For example, an employer that maintains both essential and non-essential business operations may suffer a partial suspension if a governmental order restricts the non-essential business’s operations, even if the essential business is unaffected. Additionally, an essential business that is permitted to continue its operations may be considered to have a partial suspension of its operations if a governmental order requires the business to close for a period during normal working hours.
• FAQ #33 discusses employers whose business operations continue because the employees telework. If the workplace closure causes the suspension of business operations for certain purposes, there may be a partial suspension.
• FAQ #34 provides that if an employer is closed by a governmental order for only certain purposes but remains open for other purposes or is operational for limited purposes, then there is a partial suspension.
• FAQ #35 provides that if an employer reduces its operating hours due to a governmental order, then there is a partial suspension.

• Determine if your organization qualifies for the ERC for 2020:
  1. Was the business fully or partially shut down by government order for a quarter, OR were gross receipts for the quarter in 2020 50% lower than in 2019? If yes, then each subsequent quarter would qualify until receipts exceed 80% of the 2019 quarter referenced.
  2. Did the company employ less than 100 employees?
  3. If yes, were there wages paid that quarter that were not reported on a PPP forgiveness application or used for any other credit?
  4. Contact your payroll provider to determine the best way to take the retroactive credits. We expect more guidance will become available for businesses making retroactive changes. It is possible that credit could be claimed 100% on 4Q 2020 form, though a new or amended return may be required.
• Determine if the organization qualifies for the ERC for 2021:
  1. Was the business fully or partially shut down by governmental order, OR were gross receipts for the quarter 20% lower than in 2019?
     2019. Businesses may elect to compare the prior quarter to 2019. For example, 1Q 2021 eligibility can be determined by comparing4Q 2020 to 4Q 2019.
  2. Did the company employ less than 500 employees?
  3. Will there be wages paid that quarter that will not be reported on a PPP forgiveness application or used for any other credit?
  4. Look for forthcoming rules about how to claim credit before wages are even paid and/or work with payroll company to claim on future payroll tax filings.

The retention credit has provided helpful support for eligible employers during 2020. By substantially enhancing the credit amount with more favorable rules to employers, it can become a significant source of cash flow for many more eligible businesses in 2021.

The retroactive changes to the retention credit, particularly concerning PPP loan recipients, create an immediate refund opportunity for these employers. Impacted employers with PPP loans should begin to review how both provisions might cover their payroll costs to determine which provision to apply. Consideration should be given to which expenditures are needed to support PPP loan forgiveness to determine how the payroll costs factor into that determination.

Aldrich is here to help you understand financial relief options available to you and your business. We will provide guidance on the next steps to maximize financial, tax, and business decisions. For more resources to help you navigate the developing impact of coronavirus on your business, please continue to monitor our COVID-19 Resource Center and our PPP Resource Center.