Employee Retention Tax Credit: New Features Require a Fresh Look for All Employers

January 4, 2021

The Employee Retention Tax Credit (“Credit”) was recently enhanced to provide greater benefits to those employers who qualify as “eligible employers” under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The purpose of this alert is to highlight those enhancements for eligible employers.

Background
The Credit was originally adopted as part of the CARES Act, and, prior to the enhancements discussed below, generally provided an eligible employer with a payroll tax credit up to 50% of the first $10,000 of “qualified wages” it pays to each employee (i.e., up to a $5,000 credit per employee) during the period beginning March 13, 2020 through December 31, 2020. On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 (the “Stimulus Bill”) to extend the applicability of the Credit to wages paid through June 30, 2021 and to significantly enhance the amount of the Credit available for those wages paid from January 1, 2021 through June 30, 2021.

Eligible Employers
Only eligible employers qualify for the Credit.  To be an eligible employer under the CARES Act, the employer must either: (i) have its operations fully or partially suspended due to a governmental order that limits travel, commerce or meetings during the calendar quarter in question; or (ii) suffer a significant decline in gross receipts. Under the CARES Act, a “significant decline” meant a reduction of gross receipts equal to or greater than 50% of the gross receipts the employer received for the same quarter in 2019.  The foregoing gross receipts test was modified by the Stimulus Bill as follows:

  • Lower Threshold. Beginning January 1, 2021 through June 30, 2021, the gross receipts test will be satisfied if an employer experienced a 20% reduction in gross receipts (as opposed to 50% under the CARES Act).
  • Prior Quarter Look-Back Period. Beginning January 1, 2021 through June 30, 2021, the employer is permitted to use the prior quarter for purposes of determining its eligibility under the gross receipts test. For example, an employer can look to its gross receipts in the 4th quarter of 2020 to determine whether it has satisfied the gross receipts test for the 1st quarter of 2021.

Qualified Wages
The Stimulus Bill revised the CARES Act with respect to the defined term “qualified wages” in the following respects:

  • Credit Amount Increased. For qualified wages paid on or after January 1, 2021 through June 30, 2021, the credit was increased to 70% of qualified wages paid to each employee (as opposed to a credit amount of 50% of qualified wages under the CARES Act).
  • Wage Cap Increased. The wage limit under the CARES Act was $10,000 of qualified wages paid to each employee from March 13, 2020 through December 31, 2020.  Under the Stimulus Bill, the $10,000 wage limit remain the same, however, the limit is applied on a quarterly basis for the time period beginning January 1, 2021 through June 30, 2021. For example, an employer could max-out the Credit with respect to a particular employee for the first quarter in 2021, and then have another opportunity to max-out the Credit with respect to that same employee for the second quarter of 2021.
  • Employee Threshold Increased. The amount of qualified wages under the CARES Act varied depending on whether the eligible employer had 100 or less full-time employees.  If the eligible employer had 100 or less full-time employees (determined pursuant to a look back to calendar year 2019), then the term “qualified wages” included all wages (and medical insurance premiums) paid to all employees for the period of time the employer was an eligible employer. However, if the eligible employer had 101 or more full-time employees (the “Large Employer Threshold”), then qualified wages only included that portion of wages (and medical insurance premiums) paid to employees while not performing services (i.e., wages paid while the employee was not working).  In contrast, the Stimulus Bill increased the Large Employer Threshold from 100 to 500 employees for the period of time from January 1, 2021 through June 30, 2021. This change is significant and can result in a significant increase in the amount of the Credit an employer may be eligible to receive. For example, an employer with 300 employees could be eligible for a credit of up to $2,100,000 for each of the first two quarters in 2021 and such Credit would apply irrespective of whether the employees were working. In contrast, using the same example, the credit would have applied under the CARES Act only to the extent that the employees were being paid while not working.
  • Bonus Pay. Bonus pay can now be included within the defined term of qualified wages.

Credit Advances
Under the Stimulus Bill employers with 500 or fewer full-time employees may be eligible to elect to receive an advance payment of the Credit, with such advancement not to exceed 70% of the average quarterly wages paid by the employer in calendar year 2019. No such rule existed under the CARES Act.

Coordination with PPP Loans
Under the CARES Act, an employer was not eligible for the Credit if the employer or an affiliate (generally defined as an entity related to the employer with 50% or more common ownership) of the employer received a loan under the Paycheck Protection Program (the “PPP Loan”). This prohibition was retroactively changed by the Stimulus Bill.

Under the Stimulus Bill, if the employer or an affiliate of the employer received PPP Loan proceeds, then the employer could still be eligible for the Credit so long as PPP Loan proceeds were not used to pay wages for which they are requesting the Credit (i.e., no double dipping – the same wages cannot count under both programs). Since this change is retroactive to March 13, 2020, employers that had PPP Loan proceeds in 2020 may now qualify for the Credit if qualified wages were paid in excess of the wages linked to the PPP Loan forgiveness. Also, employers who were ineligible for the Credit prior to the revisions made by the Stimulus Bill because an affiliate took a PPP Loan may now be eligible for the Credit and, if eligible, may consider filing an amended employment tax return (pursuant to a Form 941-X) to obtain the Credit. 

Please reach out to us if you have any questions about the Credit under the CARES Act or the Stimulus Bill.