The Consolidated Appropriations Act (CAA), 2021 extends and expands the employee retention credit first created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The employee retention credit is designed to encourage businesses to keep workers on their payroll, supports small businesses and nonprofits experiencing economic downturn due to the COVID-19 pandemic.
Eligible employers may claim the credit against employment taxes equal to a percentage of qualified wages paid to employees who are not working due to the employer’s full or partial suspension of business or a significant decline in gross receipts.
Eligibility and Qualifications
For calendar quarters beginning after December 31, 2020, the amount of the credit is increased from 50% to 70% of qualified wages. The limitation per employee is also increased from amounts paid up to $10,000 per year to amounts paid up to $10,000 per quarter. Eligible wages are wages paid between March 12, 2020, and July 1, 2021, extended from January 1, 2021.
In addition, the definition of an eligible employer is more inclusive under CAA, 2021 and therefore allows a greater number of employers to qualify.
An eligible employer is defined as:
- An employer whose trade or business is fully or partially suspended during the 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 the coronavirus disease (COVID-19); or
- An employer that experiences a 20% decline (down from 50%) in gross receipts for the calendar quarter compared to the same quarter in 2019.
However, if the employer was not in existence as of the beginning of the same calendar quarter in 2019, then the employer may use the same calendar quarter in 2020. Employers also have an election to determine if they meet the gross receipts test based on the immediately preceding quarter.
Qualified wages are based on the business’s average number of full-time employees in 2019.
- Small employers, those that had 500 or fewer employees (up from 100), may receive the credit for wages paid to employees whether or not they are providing services to the employer.
- Large employers, those that had more than 500 (up from 100) employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
There are special rules for seasonal workers. If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit. They can also request an advance of the employee retention credit by submitting Form 7200.
No Double Benefit
There are limitations when considering an eligible employer’s ability to claim the employee retention credit. This credit is impacted by other credit and relief provisions as follows:
- Wages that are paid for with forgiven Payroll Protection Program (PPP) proceeds cannot qualify for the employee retention credit;
- Qualifying wages for this credit cannot include wages for which the employer received a tax credit for paid sick and family leave; and
- Employees are not counted for this credit if the employer is allowed a work opportunity tax credit.
Because of these enhancements and the expansion of the employee retention credit, your small business may now have an opportunity to take the advantage of this tax benefit. Learn more about our tax advisory services and reach out with any tax planning or strategy questions.