The Consolidated Appropriations Act of 2021 (Act) was signed into law on December 27, 2020 and has significant enhancements and improvements related to the Employee Retention Credit (ERC). ERC was established by the CARES Act on March 27, 2020. The ERC is designed to encourage employers (including nonprofits) to keep employees on payroll and continue providing health benefits during the pandemic. The ERC is a refundable payroll tax credit for wages paid and health coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19-related governmental order or that experienced a significant reduction in gross receipts.
Employers may use ERCs to offset federal payroll tax deposits.
2020 ERC
The Act makes the following retroactive changes to the ERC, which apply during the period March 13, 2020 through December 31, 2020:
- Employers that received PPP loans may qualify for the ERC with respect to wages that are not included in the forgiveness of a PPP loan.
- The Act clarifies how nonprofit organizations determine “gross receipts.”
- Group health care expenses are considered “qualified wages” even when no other wages are paid to the employee.
2021 ERC (Extended to December 31, 2021)
In addition to the retroactive changes listed above, the following changes to the ERC apply from January 1 to December 31, 2021, which was extended from June 30, 2021 by the American Rescue Plan Act of 2021 (ARPA):
Increased Credit Amount
- The ERC rate is increased from 50% to 70% of qualified wages and the limit on per-employee wages is increased from $10,000 for the year to $10,000 per quarter.
Expanded Eligibility
The gross receipts eligibility threshold for employers is reduced from a 50% decline to a 20% decline in gross receipts for the same calendar quarter in 2019.
- A safe harbor is provided allowing employers to use prior quarter gross receipts compared to the same quarter in 2019 to determine eligibility.
- Employers not in existence in 2019 may compare 2021 quarterly gross receipts to 2020 quarters to determine eligibility.
Determination of Qualified Wages
- The 100-full time employee threshold for determining “qualified wages” based on all wages paid to employees is increased to 500 or fewer full-time employees.
- The Act removes the limitation that qualified wages paid or incurred by an eligible employer with respect to an employee may not exceed the amount that employee would have been paid for working during the 30 days immediately preceding that period (which, for example, allows employers to take the ERC for bonuses paid to essential workers).
Advance Payments
- Under rules to be drafted by Treasury, employers with less than 500 full-time employees will be allowed advance payments of the ERC during a calendar quarter in which qualifying wages are paid. Special rules for advance payments are included for seasonal employers and employers that were not in existence in 2019.
The Act may provide significant opportunities for your company. However, the interaction between the Act, the CARES Act and various Internal Revenue Code sections is complicated, so professional advice may be needed.
Wheeler Accountants is here to support businesses and nonprofits navigate the various credits and loans available in the latest round of stimulus to maximize all opportunities in these uncertain times.