To ease employer costs during the COVID-19 pandemic, the CARES Act provided a refundable tax credit in 2020 against withholding taxes on employees’ wages. The credit was available to employers that had not taken a PPP loan and was set to expire at the end of 2020.
The credit reduces dollar for dollar the withholding taxes that the employer otherwise owes, thus boosting cash flow.
To provide employers more relief, Congress passed the Consolidated Appropriations Act at the end of 2020, which extended the expiring employee retention tax credit to June 30, 2021. The extended credit is now more valuable to employers than what Congress designed initially.
1. Cap on Employee Retention Credit (ERC)
The employee retention tax credit was extended to June 30, 2021 (from December 31, 2020) under the Consolidated Appropriations Act. Under the new law, an employer can now receive a tax credit of up to $14,000 for each employee through June 30, 2021, (i.e., 70% of an employee’s qualified wages up to $10,000, for each quarter through June 30, 2021). This is an increase from a maximum tax credit of $5,000 per employee for 2020.
The tax credit reduces the employer’s Social Security withholding taxes dollar for dollar, and is claimed on Form 941. If the amount of the credit is more than the amount of taxes that the employer owes, the employer can receive a cash refund for the excess.
Wages that qualify for the tax credit include bonuses, and the cost of healthcare premiums paid by the employer. Healthcare premiums paid by the employee with pre‐tax, salary reduction contributions, and healthcare costs for furloughed employees are also eligible for the tax credit.
2. PPP Loans and No Double Counting
Prior to 2021, an employer that received a PPP loan was not eligible for the ERC. Beginning in 2021, however, an employer who received a PPP loan can also take an ERC, as long as the employer does not take the credit for the same wages paid with a forgiven PPP loan. An eligible employer may claim the ERC on qualified wages funded through other means, including with PPP loan proceeds that are not forgiven.
For 2021, the ERC is not available for wages taken into account under the following additional Internal Revenue Code provisions allowing tax credits: (a) Section 41 (credit for increasing research activities); (b) Section 45A (Indian employment credit); (c) Section 45P (employer wage credit for employees who are active-duty members of the uniformed services); (d) Section 51 (work opportunity credit); and (e) Section 1396 (empowerment zone employment credit).
3. Claiming the Credit Retroactively
Employers may apply for previously unclaimed employee retention credits on qualified wages paid between March 13 and December 31, 2020, by claiming the credit on the fourth-quarter Form 941 or by filing an amended quarterly employment tax return (i.e., Form 941-X) for calendar quarters of 2020 between March 13 and December 31, 2020.
4. Employers Eligible
The employee retention credit for 2021 is for eligible employers that averaged 500 or fewer full-time employees in 2019.
To qualify, the employer’s year-over-year gross receipts must have dropped at least 20%. A safe harbor allows employers to use prior quarter gross receipts to determine eligibility.
Alternatively, the employer can qualify for the ERC if it fully or partially suspended its operations during any calendar quarter because of governmental orders due to the COVID-19 emergency.
5. Affiliated Employers
All related entities are treated as a single employer for purposes of applying the eligibility rules. The aggregation rules for controlled groups, partnerships under common control, affiliated service groups, and the rules under 414(o) of the federal tax code treat related entities as one employer.
If the aggregation rules apply, the amount of the ERC must be apportioned among members of the aggregated group on the basis of each member’s proportionate share of the qualified wages giving rise to the credit.
The aggregation rules apply for:
- Determining whether the employer has a trade or business operation that was fully or partially suspended due to orders related to COVID-19 from an appropriate governmental authority.
- Determining whether the employer has a significant decline in gross receipts.
- Determining whether the employer has more than 500 full-time employees.
About the Author: Evelyn Haralampu
Evelyn Haralampu is a partner at Burns & Levinson. She specializes in assisting businesses, executives, and non-profit and governmental organizations in designing employee benefits programs and executive compensation to help clients meet their objectives, while saving and deferring costs through tax efficiencies. Evelyn has served on the ABA’s Subcommittee on Government Submissions, recommending regulatory policies to the IRS, and is a member of the Tax Council of the Massachusetts Bar Association, which influences the development of tax legislation in the Commonwealth. She can be reached at email@example.com or 617.345.3351.