CAA Payroll Provisions: Employee Retention Credit Expansion and Extension

Employee Retention Credit update

On December 27, 2020, the Consolidated Appropriations Act, 2021 (CAA, 2021) was signed into law. The CAA includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTR), which extends and expands upon the Employee Retention Credit (ERC) provided by the CARES Act.

Background. Under the CARES Act, the ERC provides a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee for a maximum credit of $5,000 per employee. The ERC may be claimed for wages paid after March 12, 2020, and before January 1, 2021. “Eligible Employers” include private-sector businesses and tax-exempt organizations whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts (sometimes referred to as a “significant decline in gross receipts”), measured on a year-over-year basis.

Expansion of ERC. TCDTR addresses the ERC by extending the availability of the credit until the middle of 2021, among other things.

Retroactive provisions. Retroactively effective March 12, 2020, TCDTR:

  • provides clarification for the determination of gross receipts for certain tax exempt organization
  • reaffirms prior IRS guidance that group health plan expenses can be considered qualified wages even when no wages are paid to an employee; and
  • provides that employers who receive a Paycheck Protection Program (PPP) loan may still qualify for the ERC for wages that are not paid for with forgiven PPP proceeds

Beginning on January 1, 2021 and through June 30, 2021, TCDTR extends and expands the following CARES Act provisions:

  • Increases the ERC rate from 50% to 70% of qualified wages
  • Expands eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provides a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility
  • Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter
  • Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees
  • Allows certain public instrumentalities to claim the credit
  • Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers
  • Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year
  • Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit; and
  • Provides for a small business public awareness campaign regarding availability of the credit to be conducted by the Secretary of the Treasury in coordination with the Administrator of the Small Business Administration.

Disaster relief. Section 303 provides a tax credit for 40% of wages   (up to $6,000 per employee) paid by a disaster-affected employer to a qualified employee. The credit applies to wages paid without regard to whether services associated with those wages were performed. Certain tax-exempt entities are provided the option to claim the credit against payroll taxes.

If you have any questions regarding the above information or would like to discuss your specific situation, please contact our office.