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.
CARES Act - Employee Retention Credit
- Up to $10,000 of wages per employee
- Payroll credit of up to 50 percent of qualifying wages paid after March 13 through Dec. 31, 2020
- 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.
| CARES Act |
COVID-19 Relief Package |
| All wages paid between March 13, 2020 and December 31, 2020 |
Beginning on January 1, 2021, and through June 30, 2021 |
| Payroll tax credit rate - 50 percent of qualified wages |
|
Payroll tax credit rate - 70 percent of qualified wages |
| Limit on per-employee creditable wages - $10,000 for the year |
Limit on per-employee creditable wages - $10,000 for each quarter |
| Eligibility for the credit - reduction of gross receipts by at least 50 percent of the comparable quarter in 2019 |
Eligibility for the credit - threshold drops to 20 percent. Safe harbor allows employers to use prior quarter gross receipts to determine eligibility |
| 100-employee delineation for determining the relevant qualified wage base (i.e. all wages paid to employees are available for the credit up to the cap) |
500-employee delineation for determining the relevant qualified wage base |
| Ineligible for ERC if you take a Paycheck Protection Program loan |
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 |
| Wage qualification is based on the average number of employees the business employed in 2019 |
Allows new employers who were not in existence for all or part of 2019 to be able to claim the credit New provision is retroactive to the effective date included in Section 2301 of the CARES Act |
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. Tax professionals can help their clients determine whether to take the Employee Retention Credit, a Paycheck Protection Program loan or if they qualify for both benefits.
Tax practitioners can stay informed about the changing tax laws and regulations, communicate the applicable measures to their clients at the right level and meet with them to take advantage of the benefits.
Replies (2)
Please login or register to join the discussion.
I would like others opinion on this example:
Employee X wages in Quarter 1, 2 and 3 = $50,000.
PPP Loan used for $20,000
Sick pay credits used for $2,000
Which leaves $28,000 available for ERC.
Limited to $10,000 = ERC of $5,000.
Or are total wages limited to $10,000 and since all used for PPP loan, no ERC available?
Assuming that the company was an Eligible Employer during the entire period (Through Government Orders or a >50% decline in Gross Receipts) and that the company had less than 100 Full Time Employees per their 2019 average, where you can include all wages, the remaining $28K of wages would be available for the ERC. That in turn would be capped at $10K and at 50%, the ERC would be $5K.
However, if they had over 100 Full Time Employees per their 2019 average, they would only be able to include Qualified Wages (Wages paid for no services) during the time that they were an Eligible Employer. That may or may not overlap with the PPP Forgiveness Period or when the FFCRA was claimed. That could result in a much different answer.