Employee Retention Credit, Changes under the Consolidated Appropriations Act, 2021

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On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (CAA2021). The CAA2021 extended and expanded the Employee Retention Credit (ERC) legislation passed under the CARES Act in March 2020.

ERC under the CARES Act

The ERC is a refundable payroll credit available to taxpayers who either:

  • Had their business fully or partially suspended during at least one quarter by government mandate, or
  • Experienced at least a 50% drop in gross receipts for quarters in 2020 compared to the same quarter in 2019.

Once a business had a quarter in which either (1) or (2) occurred, they could claim a credit of 50% of employee wages capped at $10,000, or $5,000 per employee who were paid “qualified wages” from March 12, 2020 – December 31, 2020. “Qualified wages” are broken down into two groups:

  • Large Employer – Qualified wages include only wages paid to employees while not providing services. (101 employees or greater)
  • Small Employer – Qualified wages include all wages paid to employees during the eligible quarter (1 – 100 employees).

Under the CARES Act, businesses who took advantage of a Paycheck Protection Program (PPP) loan were prohibited from taking the ERC.

ERC, as amended under CAA2021

  • The CAA2021 expanded the ERC by allowing businesses who took advantage of a PPP loan to claim the ERC retroactively on wages paid from March 13, 2020 – December 31, 2020, NOT FORGIVEN under a PPP loan.
  • It is anticipated the retroactive ERC benefit for 2020 will be captured on the fourth quarter federal form 941, although the IRS has not provided final guidance on this matter.
  • For ERC’s claimed in 2021, the following modifications apply:
    1. The requirement for decline in gross receipts was reduced from 50% to 20%.
    2. Qualified wages were increased from $10,000 per employee annually under the CARES Act to $10,000 per quarter, for wages paid from January 1, 2021 – June 30, 2021.
    3. The credit increased from 50% of qualified wages ($5,000 maximum credit per employee) to 70% of qualified wages ($14,000 maximum credit per employee, $7,000 maximum per the first two quarters of 2021).
    4. Increased the number of employees to count as a small employer to 500 or less.

Please contact your Lutz, Selig & Zeronda, L.L.P. advisor for further guidance and to address any questions you may have regarding the ERC application process.