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Daniel F. Rahill, LL.M, CPA, J.D.
Managing Director
Wintrust Wealth Management

The Consolidated Appropriations Act, 2020 (CCA), signed into law on December 27, 2020, made a number of changes to the Employee Retention Credit (ERC) to make it much easier for impacted businesses to keep their employees on the payroll during Covid-19. Created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the ERC was to expire at the end of 2020. The CCA modified and extended the ERC for six months through June 30, 2021, and made significant changes that will benefit small businesses for both 2020 and 2021.

Changes for 2021
Effective January 1, 2021, employers are ERC eligible if they operate a trade or business during January 1, 2021, through June 30, 2021, and experience either:

  1. A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
  2. A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50%).

It also expands the ERC and makes several technical corrections. The expansions of the credit include:

  • An increase in the refundable credit rate from 50% to 70% of qualified wages;
  • An increase in the limit on per employee creditable wages from $10,000 for the year to $10,000 for each quarter;
  • A reduction in the required decline in year-over-year gross receipts from 50% to 20%;
  • A safe harbor allowing employers to use prior-quarter gross receipts to determine eligibility;
  • A provision to allow certain governmental employers to claim the credit;
  • An increase from 100 to 500 in the number of employees counted when determining the relevant qualified wage base; and
  • Allowing new employers who were not in existence for all or part of 2019 to be able to claim the credit can use the corresponding quarter in 2020 to measure the decline in their gross receipts.

For the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.

In addition, effective January 1, 2021, the definition of qualified wages was changed to provide:

  • For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.
  • For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.

As a result, eligible employers can now claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees after December 31, 2020, through June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERC amount available is $7,000 per employee per calendar quarter, yielding a refundable credit of $14,000 per employee for the two quarters ending June 30, 2021.

Employers can access the ERC for the first and second quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than 500 employees.

Retroactive 2020 ERC Opportunities
Under the terms of the CARES Act, if an employer received a loan under the Paycheck Protection Program (PPP), the employer was not eligible to claim the CRC. Retroactive to the CARES Act effective date, the law now allows employers who received PPP loans to claim the ERC for qualified wages as long as those wages were not used to obtain PPP forgiveness.

Other retroactive changes going back the effective date of the ERC include:

  • Specifying that qualified health expenses are eligible for the credit even if no qualified wages were paid, and
  • Clarifying the determination of gross receipts for certain tax exempt organizations.

For more information, see COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs


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