COVID-19 Stimulus Package Significantly Expands CARES Act Employee Retention Tax Credits

Overview


The Consolidated Appropriations Act, 2021, which became law on December 27, 2020, makes significant changes to the employee retention tax credits available under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act).

The changes are generally designed to increase the availability, scope and amount of the credits. Significantly, certain employers that received a Payroll Protection Program (PPP) loan (or that were related to employers that received a PPP loan) may be eligible to claim the credit, including retroactively for periods beginning as early as March 13, 2020.

For general information on the employee retention tax credits as originally included as part of the CARES Act, please see our On the Subject here.

In Depth


Now Available to Eligible Employers Who Received PPP Loans

The PPP under the CARES Act allowed eligible employers to borrow up to $10 million at a fixed interest rate of 1% for a two-year term if the loan was used to pay certain business expenses, including payroll and employee benefits. PPP loans are forgivable if they are used to retain and pay employees, rent, utilities and interest on mortgage obligations during the eight-week period following loan origination. The Consolidated Appropriations Act authorized an additional $284 billion in PPP loans to be issued to eligible employers. For general information on the PPP, please see our On the Subject here.

The CARES Act stipulated that an employer that received a loan under the PPP was ineligible to claim employee retention tax credits for any wages paid to its employees. The Consolidated Appropriations Act provides that an employer that received a PPP loan may claim the credit, including retroactively for periods beginning as early as March 13, 2020, as long as the employer does not claim the credit with respect to wages paid with the proceeds of a PPP loan that was forgiven. In other words, an employer may not receive a double benefit by claiming the credit on wages paid with loan proceeds that the Small Business Administration has forgiven. In contrast, however, an eligible employer may claim the credit for wages paid with PPP loan proceeds that are not forgiven.  In addition, eligible employers that pursue PPP loan forgiveness may still claim the credit for wages that are not covered by the forgiven PPP loan (i.e., wages that are not paid from such loan proceeds).

This means that an employer that received a PPP loan in 2020 may still be eligible to capture the employer retention tax credit. Employers that claim the credit retroactively for wages paid in 2020 may generally claim the credit on their fourth-quarter Form 941 due by January 31, 2021. After that date, the methodology changes and requires more IRS interaction, including the employer’s proactive filing of refund claims and ensuing IRS review of those refund claim filings. Click here for further details about claiming this credit for 2020. For details about retroactive eligibility of credits and relevant effective dates, please click here.

Additional Changes under the Consolidated Appropriations Act

The Consolidated Appropriations Act made the following additional changes to the CARES Act employee retention credits, which are effective beginning on or after January 1, 2021:

  • Amount of the Credits. The credits available under the CARES Act equaled 50% of up to $10,000 in qualified wages that an eligible employer pays in a calendar quarter. The Consolidated Appropriations Act increased the amount of the credits to 70% of up to $10,000 in qualified wages that an eligible employer pays per calendar quarter, with a maximum credit of $7,000 per employee, per quarter. The maximum credit under the CARES Act for wages paid to any employee was $5,000. The Consolidated Appropriations Act increased the maximum credit for the first two quarters of 2021 to $14,000 per employee. The credit also is available even if an employer received the $5,000 maximum credit for wages paid to an employee in 2020. In addition, the Consolidated Appropriations Act removes the CARES Act cap on wages to allow the credit to be claimed on pay increases and bonuses in excess of the amount that the employee earned during the 30 days preceding the shutdown or the significant decline in gross receipts.
  • Large Employers. What constitutes qualified wages for which the employee retention credits can be claimed depends on the size of the employer’s average full-time workforce in 2019, with more stringent criteria for larger businesses. The Consolidated Appropriations Act increased the threshold for determining a large employer from 100 employees under the CARES Act to employers with more than 500 full-time employees in 2019. This change would allow more employers to be considered small employers and claim the credits on all wages paid to employees, even if the employees are providing services during the period for which the credits are claimed. In contrast, an employer with more than 500 full-time employees in 2019 may claim the credit only for wages paid to an employee while the employee is not performing services for the employer.
  • Gross Receipts Test. An employer’s initial eligibility for the credits is triggered if either of two COVID-19 economic hardships arise within a calendar quarter for 2020. The second of these economic hardships is a significant decline in gross receipts, which occurs during a calendar quarter when the employer’s gross receipts are less than 50% of the employer’s gross receipts for the same calendar quarter in 2019. The Consolidated Appropriations Act now only requires a 20% (rather than 50%) reduction in gross receipts to qualify for the credit, thereby making it easier for employers to be an eligible employer for this credit. . Employers that experience a full or partial suspension of business operations due to a COVID-19-related governmental order will also continue to qualify for the credit, regardless of the amount of an employer’s total gross receipts.
  • Government Employers’ Eligibility. Under the CARES Act, credits were not available to federal, state and local governments and their political subdivisions, agencies and instrumentalities. However, the Consolidated Appropriations Act eliminates this limitation for certain governmental entities beginning in 2021. As a result, certain public entities may now qualify for the credit. This includes colleges and universities, entities with the principal purpose or function of providing medical or hospital care and certain tax-exempt corporations organized as an instrumentality of the United States.

Comparing the CARES Act and the Consolidated Appropriations Act

 

CARES Act Consolidated Appropriations Act
Amount of Credits The credits equal 50% of up to $10,000 in qualified wages that an eligible employer pays in a calendar quarter for periods from March 13, 2020, to December 31, 2020. The maximum credit is $5,000.

The wages for which an employer could claim the credit were capped at the amount the employee would have received for working an equivalent duration during the 30 days preceding the shutdown or the significant decline in gross receipts.

Effective January 1, 2021, to June 30, 2021, the credits equal 70% of up to $10,000 in qualified wages that an eligible employer pays per calendar quarter, with a maximum credit of $7,000 per employee, per quarter. The maximum credit for the first two quarters of 2021 is therefore increased to $14,000 per employee. The credit also is available even if an employer received the $5,000 maximum credit for wages paid to an employee in 2020.

In addition, the CARES Act cap on wages is removed, which allows the credit to be claimed on pay increases and bonuses paid in excess of what the employee earned prior to the shutdown or significant declined in gross receipts.

Large Employers A large employer for purposes of determining qualified wages is an employer who averaged more than 100 full-time employees in 2019. Effective January 1, 2021, a large employer for purposes of determining qualified wages is an employer who averaged more than 500 full-time employees in 2019.
Gross Receipts Test An employer is eligible for the credits if the employer’s gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019. Effective January 1, 2021, an employer is eligible for the credits if the employer’s gross receipts are less than 80% of gross receipts for the same calendar quarter in 2019.
Governmental Employers’ Eligibility The employee retention credit was not available to any federal, state or local governments, or any agency or instrumentality thereof. Effective January 1, 2021, the employee retention credit is available to public colleges or universities, organizations whose principal purpose is providing medical or hospital care and certain federal instrumentalities.