The Employee Retention Credit — enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act — helps employers whose businesses have suffered financially as a result of COVID-19 to keep employees on their payrolls. It’s one of several provisions in the act aimed at keeping people employed through the economic downturn. The legislative changes passed at the end of 2020 expand the benefits of this Employee Retention Credit. A company that receives a Paycheck Protection Program (PPP) loan is no longer prohibited from claiming the employee retention tax credit. The credit can be claimed for any wages not used to support PPP loan forgiveness. Employers need to understand the features of each incentive in order to make the right choice for their businesses. Here, we answer the most common questions about the Employee Retention Credit, including how it “plays” with other COVID-19 relief provisions.
What Is It?
The employer retention incentive helps businesses pay employee wages via a refundable tax credit worth 50% of up to $10,000 in wages paid to each employee by an eligible employer for all of 2020. Those amounts change to 70% of eligible wages up to $10,000 per employee per quarter for eligible wages from January 1, 2021, to June 30, 2021. The expanded credit in 2021 allows for up to $14,000 per employee as a maximum credit for the first two quarters of 2021.
Unlike some CARES Act incentives, this credit is available to all employers regardless of size, including tax-exempt organizations. The only employers who cannot claim this credit are state and local governments and their instrumentalities. Qualifying employers must meet one of the following criteria:
- The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
- Gross Receipts Test
2020 Criteria: The employer’s 2020 gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s current-year gross receipts go above 80% of the comparable 2019 quarter, the employer will cease to qualify after the end of that quarter.
2021 Criteria: The employer’s 2021 gross receipts have decreased by 20% of the comparable quarter in 2019.
The COVID-19 stimulus package adjusts the retention credit to allow for many additional businesses to be eligible due to lowering the bar for the reduction in gross receipts and allowing the use of retention credits alongside PPP loans.
How Is the Credit Calculated?
For 2020, the amount of the credit is 50% of qualifying wages (cash payments and a portion of the cost of employer-provided healthcare), up to $10,000 in total, for a maximum $5,000 credit per employee.
For 2021, that amount becomes 70% of qualifying amounts up to $10,000 per employee. Also new for 2021, the credit is calculated as $10,000 per employee per quarter (vs. 2020 rules where its $10,000 per employee for the entire year). Thus for 2021, the maximum credit is $7,000 per employee per quarter or $14,000 for the first two quarters of 2021.
In summary, wages paid from March 12, 2020, to December 31, 2020, are eligible for the 50% credit while wages paid from January 1, 2021, to June 30, 2021, are eligible for the expanded 70% credit. Wages that are used to calculate the Employee Retention Credit for an employer cannot be used in the calculation of the Work Opportunity Credit, Sick and Famiy COVID Leave Credits, or PPP Loan Forgiveness—businesses cannot double dip.
What Wages Qualify?
Qualifying wages are based on the average number of workers a business employed in 2019:
- For 2020 Employee Retention Credit
- Employers with 100 employees or fewer: the credit is based on wages paid to all employees regardless of whether or not they were able to perform work. If the employees worked and were paid for that work, the employer still receives the credit.
- Employers with more than 100 employees: the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
- For 2021 Employee Retention Credit
- Employers with 500 employees or fewer: the credit is based on wages paid to all employees regardless of whether or not they were able to perform work. If the employees worked and were paid for that work, the employer still receives the credit.
- Employers with more than 500 employees:the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
How Does an Eligible Employer Claim the Credit?
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
How Does the Credit Interact with Other COVID-19 Relief?
Before the Consolidated Appropriations Act of 2021, companies had to pick between the Employee Retention Credit and the PPP loan forgiveness program. With the recent legislation, companies can have both.
The only catch is that companies can use eligible payroll costs for either PPP loan forgiveness or for the Employee Retention Credit. As long as the company isn’t using the same payroll costs for both programs, it’s now completely legit to take advantage of both.
In addition to using payroll for government programs such as PPP loans and Employee Retention Credits, companies can also take advantage of the Families First Coronavirus Response Act (FFCRA) paid leave credits. These credits generate additional liquidity for companies continuing to look for assistance in the months affected by government efforts to slow the spread of the virus.
Evaluating the Options
The best option for your business will depend on a review of your specific facts and circumstances. If you have any questions about COVID-19 relief or would like help evaluating the available options, please contact your CRI engagement team or check out our helpful comparison chart as an initial resource.