Here is a recap of the Employee Retention Credit under the CARES Act and the higher-impact modifications under the latest COVID-19 Relief Package.  The credit was extended through June 30, 2021 and some of the requirements to take the credit have changed favorably:

CARES Act - Employee Retention Credit

• Up to $10,000 of wages per employee for the year
• Payroll credit of up to 50 percent of qualifying wages paid after March 13 through Dec. 31, 2020
• Eligibility for the credit - reduction of gross receipts by at least 50 percent of the comparable quarter in 2019
• 100-employee limit for determining the relevant qualified wage base (i.e. all wages paid to employees are available for the credit up to the cap)
• Ineligible for ERC if you take a Paycheck Protection Program loan
• You reduce federal tax deposits for withholdings related to payroll
• If the deposits are not enough to cover the credit you can apply for an advance

Latest COVID-19 Relief Package - Employee Retention Credit

• Up to $10,000 of wages per employee for each quarter
• Payroll credit of up to 50 percent of qualifying wages paid after March 13, 2020 through June 30, 2021
• Eligibility for the credit - threshold drops to 20 percent. Safe harbor allows employers to use prior quarter gross receipts to determine eligibility
• 500-employee limit for determining the relevant qualified wage base
• Employers who receive PPP loans may still qualify for the ERC with respect to wages that are not paid for with forgiven PPP proceeds Retroactive to CARES Act
• You reduce federal tax deposits for withholdings related to payroll
• If the deposits are not enough to cover the credit you can apply for an advance

How to report the credit:

• Form 7200 was available to request an Advance Credit for the first quarter of 2020 tax reductions (qualifying wages from March 13 to March 31).
• Federal Form 941 (effective for Quarter 2) can be used to report any credits for qualifying wages between Quarter 2 and Quarter 4 of 2020.

Other Changes Under COVID-19 Relief Package

• It clarifies that group health plan expenses can be considered qualified wages even when no other wages are paid to the employee, consistent with IRS guidance (this can occur with furloughed employees).
• The credit is available to certain government instrumentalities, including colleges, universities, organizations providing medical or hospital care, and certain organizations chartered by Congress.

We’re expecting the IRS to issue guidance on how to claim the credit for the retroactive measures and for advance payments for the new provisions in 2021.

Example

Let’s say you have an employee who earns $10,000 in wages for each of the last two quarters in 2020.  Under the CARES Act, the credit would be $10,000 x 50 percent = $5,000 ($10,000 wage limit applies to the full year).

Now let’s say you have an employee who earns $10,000 in wages for each of the first two quarters in 2021.  Under the COVID-19 Relief Package, the credit would be $20,000 x 70 percent = $14,000 ($10,000 wage limit applies to each quarter).

Key Insights

The extension of this tax credit will help keep additional U.S. workers on payroll and more small businesses and nonprofits across the country afloat.

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